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Post Office Board Agenda
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Date
31 July 2018
Start Time
Finish Time
12.30hrs 16.30hrs
Loca
1.19 Wakefield
Present
* Paula Vennel
© Ken McCa
© Alisdair Cam
‘* Tim Parker (Chairman) « Tom Cooper
In Attendance
© Tim Franklin
© Shirine Khoury-Haq
jeron © Carla Stent (by
phone) Director)
‘Jane MacLeod (Company Secretary) Jeff Lewis (IT)
Veronica Branton (Minute Secretary) ‘* Ben Foat (Legal Director)
Debbie Smith (CEO - Retail)
Martin Kearsley (Banking Framework ‘* Micheal Passmore (Finance Director)
‘© Owen Woodley (CEO - FS&T)
(Compliance Director)
Agenda Item
Action
Needed
Purpose
Timings
Board re-appointment Ratification To ratify the decision of BEIS to re-appoint Tim Parker as Ken McCall 12.30hrs
Chair of Post Office Limited for a four year term until 30
September 2022.
Annual Report and Accounts: 12.35hrs
ARC Approval The Board is requested to approve the ARA subject to Al Cameron/Tim Franklin
finalisation and to approve delegation of authority to Tim
Parker, Paula Vennells and Alisdair Cameron to finalise any
outstanding matters and sign thereafter.
Remuneration Committee Approval The Board is requested to approve the proposals Ken McCall/ Natasha Wilson
recommended by the Remuneration Committee.
3. I Appointment of External Auditors ‘Approval The Board is requested on the recommendation of the Audit _I Tim Franklin
Committee to approve the appointment of the External
Auditor.
Minutes of previous Board and Committee meetings Approval Minutes formally agreed. Jane Macleod 12.50hrs
including Status Report
5. I CEO Report Noting and Input ‘CEO to update the Board on the report. CEO) 12.55hrs
6. I Financial Performance Report Noting and Input CFOO to update the Board on the report. CFOO / Micheal Passmore 13.15hrs
7. I UKGI Quarterly Report Decision For the Board to approve the quarterly funding request. CFOO 13.30hrs
CE Performance Report — Retail g and Input To update the Board on retail performance. Debbie Smith 13.45hrs
Post Office Board Agenda
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9. I Banking Framework Discussion and Input I To update the Board on negotiations on the Banking Debbie Smith/ Martin Kearsley 14.10hrs
Framework.
10, Corporate Structures I Discussion and Input I For the Board to discuss initial thinking and analysis on Jane MacLeod/ Ben Foat/Jono Hill I 14.40hrs
changes to the corporate structure.
11] Postmaster Litigation (including contingency planning) _ I Noting and Input To update the Board on the Postmaster Litigation. Jane MacLeod 15.00hrs
12. FRES Update Decision To update the Board on the analysis of the potential purchase I Owen Woodley 15.20hrs
of the other half of FRES and seek the Board’s approval of the
next steps.
13 Everest Noting and Input To update the Board on Project Everest. Jeff Lewis 15.40hrs
14] Back Office Transformation Noting and Input To update the Board on the Back Office Transformation ‘Al Cameron 15.50hrs
Programme.
15,I Items for Noting 16.0Shrs
15.1. Sealings Noting For the Board to be aware of the affixing of the Seal Jane MacLeod
15.2. Health & Safety Noting To update the Board on Health & Safety. ‘Al Cameron
15.3. Future Meeting Dates Noting For the Board to note the future meeting dates for 2018. Jane MacLeod
15.4. Forward Agendas Noting For Board to note. Jane MacLeod
16.I Any Other Business 16.15hrs
CLOSE
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POST OFFICE LIMITED PAGE 1 OF 1
BOARD
Re-appointment of Chairman
Author: Veronica Branton, Head of Secretariat Sponsor: Jane MacLeod, Company Secretary
Meeting date: 31 July 2018
Executive Summary
The Articles for Post Office Limited state that:
“APPOINTMENT OF CHAIRMAN AND DIRECTORS
(A) Chairman
The Special Shareholder shall be entitled from time to time to appoint and remove any
person as chairman of the company by notice in writing delivered to the company and signed
on behalf of the Special Shareholder.”
The Chairman has confirmed that he wishes to serve a second term, the Special Shareholder has provided
written consent and the Board is invited to ratify the re-appointment.
Input Sought Input Received
1. The Board is invited to RATIFY the 2. The Special Shareholder has provided
re-appointment of Tim Parker as written consent to the re-
Chairman of Post Office Limited for appointment.
a four year term of office until 30
September 2022.
Strictly Confidential
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Board Meeting
MINUTES OF A MEETING OF THE BOARD OF DIRECTORS OF POST OFFICE LIMITED HELD ON THURSDAY 24 MAY
2018 AT 20 FINSBURY SREET, LONDON EC2Y 9AQ AT 11.15AM
Present: Tim Parker Chairman (TP)
Alisdair Cameron Chief Financial and Operations Officer (CFOO)
Tom Cooper Non-Executive Director (TC)
Tim Franklin Non-Executive Director (TF)
Shirine Khoury-Haq Non-Executive Director (SK)
Ken McCall Senior Independent Director (KM)
Carla Stent Non-Executive Director (CS)
Paula Vennells Group Chief Executive (CEO)
In Attendance: Jane MacLeod General Counsel & Company Secretary (JM)
Veronica Branton Minute Secretary (VB)
Debbie Smith Chief Executive, Retail (DS) item 9
Martin Kearsley Banking Director (MK) item 7
Owen Woodley CEO — FS&T (OW) item 8
Rob Houghton Group Chief Information Officer (RH) items 9 & 10
Martin Hopcroft Head of Health and Safety (MH) item 13
Apologies: None ACTION
1. DECLARATIONS OF CONFLICTS OF INTEREST
Tim Franklin noted, in relation to the item requesting a capital injection into PO
Insurance (item 5.), that he sat on the PO Insurance Board.
2. PO LIMITED BOARD APPOINTMENT AND COMMITTEE APPOINTMENTS
The Board RESOLVED to appoint Shirine Khoury-Haq as a Non-Executive Director of
Post Office Limited for an initial period of three years with effect from 24 May 2018,
subject to the usual clearances.
The Board RESOLVED, on the recommendation of the Nominations Committee:
to appoint Tom Cooper as a member of the Remuneration
Committee
e to appoint Shirine Khoury-Hag as a member of the Nominations
Committee and the Remuneration Committee.
3. MINUTES OF PREVIOUS BOARD AND COMMITTEE MEETINGS INCLUDING STATUS
REPORT
Minutes of the meeting of the Board held on 27" March 2018 were APPROVED and
AUTHORISED for signature by the Chairman.
4. CEO’s REPORT
4.1 The Board NOTED the CEO’s report.
4.2 The CEO updated the Board on a number of recent issues and answered a number of
questions:
e there had been 4 outages with Verizon which was unacceptable and the CEO
would be meeting the Verizon CEO. An additional back-up centre was being set
Strictly Confidential
5.1
5.2
5.3
6.1
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up for us. The outages had affected a lot of branches sometimes in the middle of
the day
© preparation for GDPR continued as it came into force on 25 May 2018. PWC’s
view was that PO Limited was further progressed than many organisations;
however, we had not yet revised all of our contracts to be GDPR compliant and
in some instances other parties to a contract were requesting changes to the
liabilities in the contract. This had been reported at the last ARC meeting
¢ work on Project Panther was on track and contracts should be ready for
signature next week
e Unite had voted in favour of a 2.6% pay deal for the manager population the
previous day
e the PO Graduates had given an excellent presentation to the GE on their projects
and we would like them to present to June or July Board
McColl’s had reported that they were not making a profit in their branches
containing POs; however, we had worked on some pilot stores with McColl’s
which had been successful.
FINANCIAL PERFORMANCE REPORT
The Board NOTED the Financial Performance Report.
The CFOO reported that:
© our figures were better than budget by about £1m but that some of the Telco
error would need to be reflected in our figures
© Easter cash was coming back in
e the rate of change we needed to deliver this year was behind but we would be
focussing on that at the next Investment Committee meeting
© Bol was seeking to exit the ATM market and we would need to consider the
strategic issues linked to this for us.
A number of issues were raised:
¢ whether the parcels market was robust. It was reported that the only significant
risk flagged to us by RM was GDPR but this mostly affected junk mail and this
was not where PO generated trading profit
e that it would be helpful to have an explanation of the economics of ATMs and
how the market operated. Tim Franklin noted that he had run the ATM network
at Barclays and had offered support to Owen Woodley as he considered Bol’s
proposals. It was noted that the discussions on ATMs needed to be linked to the
discussions on the Banking Framework. The longer term need for access to cash
was also discussed, including whether we needed to be cautious about investing
in an ATM network if we were moving quickly to being a cashless society
(discussed further under item 8. below)
e that it would be helpful to receive more information and graphs that showed the
indicative growth and profitability of the business looking at performance for the
previous period and where we were heading. It was suggested that this could be
structured like a balanced scorecard looking at each product group.
POST OFFICE INSURANCE REGULATORY CAPITAL
It was noted that we did not currently charge for capital provided to PO Insurance
but did charge for the services we provided. It was thought that it would be
Strictly Confidential
Board Meeting
(see 8. Below)
CFOO
6.2
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worthwhile considering the approach for future, especially as we began to set up
additional subsidiaries.
The Board RESOLVED to:
1. grant written consent to the allotment by Post Office Management Services
Limited of 5,000,000 ordinary shares of £1.00 each
2. approve the subscription of 5,000,000 ordinary shares of £1.00 each in POI, for a
total consideration of £5,000,000
3. authorise any one Director or the Secretary to execute on behalf of the Company
any documentation in connection with the allotment of the shares.
ANNUAL REPORT & ACCOUNTS 2017/18 (ARA)
The CFOO updated the Board on the work required to complete the ARA.
Firstly, it had been agreed with the ARC that we would not seek to finalise the ARA
until the end of June given the delay in POLSAP migration and the further post
balance sheet event work required.
Secondly, we were still confirming with EY that we remained correct in holding the
NCS borrowing off balance sheet.
Thirdly, and most seriously, the day after the ARC, an issue had been identified by
the Telco Team in which we had overstated accrued, unbilled income by c. £5.2m:
£0.4m in 2016-17 and £4.8m in 2017-18. The error had been made within reporting
received from Fujitsu, who ran the billing systems. We believed that £5.2m was a
prudent figure but revised reporting from Fujitsu was expected within the next few
days and the number might change.
The 2016-17 error was small and EY had already identified a larger credit adjustment: as a
result so no change was required to previously published financial statements.
For 2017-18, AC noted that we had identified some credits in our work relating to
2017-18 trading that might, at least in part, offset the impact of the error. He
recognised that this was uncomfortable although the Board would also remember
that we had been explicit about managing our judgements prudently because of the
risks we ran.
The Board asked a number of questions and AC clarified that:
¢ we were considering two trading related areas of possible mitigation, the Bol
settlement and agents’ pay accruals, where the situation had been changing
towards year-end and we now had more information to base our judgements
on
. this was not a general round of small judgements
* old credits or provision releases retained because of risk in POLSAP would not
be released and if they were, there would be no impact on 2017-18 EBITDAS
because they could not be considered part of last year’s trading
. the process for all adjustments would be for the executive to write a paper on
each proposed item. EY would reach its own judgement. Management, ARC,
Board and EY would all need to agree our 2017/18 trading figure which was
specifically disclosed in our audited financial statements.
For the other outstanding items, the POLSAP work was underway and given the
Strictly Confidential
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Telco issue, we were working through all the balance sheet accounts to identify and
work through any further high risk items.
Acall had been arranged with the Bank of England for the following week to discuss
whether NCS borrowing should be included on our balance sheet or not.
The issues raised were discussed in detail, including the following:
«what controls existed on checking and testing accruals. AC reported that there
were several controls to ensure that we accrued the number in line with the
reporting, supported by monthly business and financial balance sheet reviews.
The increase in unbilled income had been questioned and had been attributed
to a number of factors including the New Call acquisition, price increases and
increases in customer numbers. This had not been proven and we should have
spotted the issue on the balance sheet well before the £5m accrual had been
reached
. how we would assure ourselves that we were still holding appropriate
provisions if we were stripping some of our prudence out. A question was
asked about whether this was an instance of weak controls and systems for
which we had been holding the provisions. AC re-confirmed that old provisions
etc. relating to POLSAP were fully retained. We would only adjust for items that
were directly related to 2017-18 trading where the evidence was improved
. it was noted that we were comfortable having a prudent approach but our
incentive plan was based on trading performance and if that had been
overstated that needed to be considered when determining the bonus
payments to be made. The Chair of ARC would need to be comfortable that
the figures were right and that all the necessary work had been done to
support using some of our provisions. AC agreed — our core bonus measure was
EBITDAS which would be agreed by the Board and EY as part of finalising the
financial statements. Any related bonus payments should flow from that
published, audited measure. Clearly, with an opportunity to make changes to
the personal element of bonuses as required
. the Board then discussed how accountability for the error should be reflected
in bonus payments to specific individuals, noting that there was a chain of
responsibility. Board Members were broadly comfortable with the trading
figure in the ARA being the basis of bonus payments for staff other than those
identified as having specific accountability for the error but this would be a
matter for discussion at the Remuneration Committee once further work had
been done, considering both causation and fairness. It was noted that EY had
concerns about the risks associated with the migration from POLSAP and would
be more comfortable to sign-off the accounts post migration in the autumn to
make sure we understand the full picture
. independent review of our controls was supported in addition to management
actions and learnings but there was concern that this might not be quick
enough if we waited for a new firm. It was agreed that we should we do a
deep dive into certain areas that could be more targeted with the current
Internal Audit team leading
*® everyone agreed that there were lessons that needed to be learnt. We were a
business with a billion pound turnover but which did not generate significant
trading profit currently so an over accrual of £5m was a significant issue.
Strictly Confidential
7.3
8.1
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The next steps AGREED were:
1. the extended post balance sheet events reviews of POLSAP balances, which
were already underway, would be completed to ensure we had not missed any
liabilities or had unsupported assets on our balance sheet
2. areview would take place of any other high risks accounts that might exist
3. we would prove and document the loss of income for prior years on the Telco
error
4. we would assess and separately document potential credits for two items: the
main Bol profit share and agents’ pay. Before recommending any adjustment
the documentation would need to prove not only that credit should be taken
but that it developed late in 2017-18, was trading and that we were more
comfortable with it now post balance sheet than we had been at the time
5. the meeting would take place with BoE to discuss whether NCS should be on or
off balance sheet
6. aseries of reviews to provide further assurance over the financial control
framework — for example, on revenue recognition, would be agreed with
Internal Audit
7. an additional ARC call and Board call would be set up for the end of June or very
early July
8. aRemCo meeting would be set up, with the timetable and structure agreed with
the Chair of RemCo. The issues noted in relation to the RemCo discussions on
bonus were that:
- we were not seeking to unfairly penalise individuals or “set an example”
but those with some accountability in the process needed to understand
that controls for which they were partly responsible had led to a significant
failing
- _ the Committee would need to receive recommendations on the approach it
should consider taking informed by the work being undertaken to
understand the error.
9. adecision would need to be reached by 6 June 2018 on whether bonuses should
be paid at our best view for June explaining that more might be payable later or
to defer payments. This decision would need to reflect the possibility that the
ARC might wish to defer the signing the accounts until we had migrated from
POLSAP, which would probably be October/November 2018.
FUTURE OF BANKING FRAMEWORK
Debbie Smith introduced the paper. Responsibility for the Banking Framework had
moved to the Retail Business unit in March 2018. Work had also been taking place
on POCa and ATMs, looking at the strategic links between these and the Banking
Framework. This review had led us to conclude that cash would still have a role in
the future; it would keep cash in our communities; drive footfall in branch; and drive
social inclusion. We had been considering what more we could do with our Banking
Framework.
Martin Kearsley provided an overview of the developing strategy:
© we wanted to encourage! ‘0 get more of their customers to use PO
¢ we would be developing a plan and coming back to the Board which would
inform Framework 2
© we intended to:
IRRELEVANT
Strictly Confidential
8.2
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© we were bringing in additional resource through an individual who had run the
Hl network for a number of years
© we wanted to get all the banks to go with us into Framework 2
¢ the opex! "IRRELEVANT but we could still make the business case work.
A number of points were raised, including:
e the more structured approach was welcomed and the development of banking
services linked to the Banking Framework was seen as a good opportunity
e the impact on customers of expanding our banking services was discussed,
including whether there could be any negative impacts on existing customers,
such as increased queue times. It was noted that that could be the result if we
did nothing to speed up the transaction processes; however, we were tackling a
number of transactional elements such as introducing money counters. The
development of our banking services was seen as commercially viable and with
social purpose. It linked into our wider retail strategy giving customers greater
choice in how they interacted with us, while automating and simplifying
processes to help reduce queue times
¢ whether the capex figure wasiir
be needed to increase security in branches as access to
continued to reduce. It was suggested that the banks
including for the investment which would
i ‘et
increased security requirements
e that we needed to re-assess regularly what was needed to keep our branches
secure, for example supplying cameras when cash was being counted. The
Board would need to be assured that appropriate security measures were in
place, including in branches in rural communities which could be more
vulnerable
e it was noted that a visit to Norway was taking place in a couple of weeks to see
the equipment in place in their branches to minimise the handling of cash and
improve security. It was reported that a business case was being developed
around investing in improved security in branches but thought would be given to
how to join this up with the development of the Banking Framework and the
e whether we had the right range of skills and experience in the team to get the
best possible deal or if any additional support was needed both on negotiating
and landing the deal. For example, did we need external advisers who had
expertise in determining costs and charges?
e whether the figures included in the paper were sufficiently robust. It was noted
that the costs might be:___ IRRELEVANT noting the earlier discussion on
investment in improved security, but that we had not yet looked at how we
~— IRRELEVANT he development of the
Banking Framework was a growth area for the business and needed to address
how! IRRELEVANT 4
e that the deal struck with the first party was critical because it would provide the
benchmark for subsequent deals
© we had to be clear what we were asking from Postmasters offering a banking
service and what we were offering them in return. Agents’ pay was clearly an
issue
e that it would be helpful to have a refresher on ATMS and the history of POCa
before coming back to the Board on our developing strategy on these issues.
Strictly Confidential
Board Meeting
MK
9.2
9.3
10.
10.1
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PEREGRINE UPDATE
Owen Woodley introduced the paper which provided an update on our re-
negotiations with Bol and highlighted a number of issues:
e we had engaged Fenchurch to do some modelling work for us, looking at the cost
of doing a deal/ not doing a deal with Bol, including the!
e the signals on achieving a positive deal Temained good; the only note of caution
was that Bol’s latest figures had been weak and they had been/_
It was noted that the Bol Group CEO would
gy publically in about 3 weeks’ time.
p
A number of points were raised, including:
e it was noted that in the event of Bol wanting to end its deal with us, it would be
} They would
have to be able t
our dialogue with Bol would be different if we were looking ti
The work done by Fenchurch
suggested a jbut a lot would hinge on whether Bol
to understand
I IRRELEVANT
© that it would be helpful if the next Bo:
would be if Bol decided it wanted to!
IRRELEVANT
The Board supported the approach set out in the paper of pursuing Option 2 while
keeping Option 3 open in the short term.
The Board RESOLVED to:
¢ allow the executive more time to conclude the re-negoti
¢ delegate authority to the executive to agree a 9-monthi IRRELEVANT
e support further advisory firm engagement. .
In addition, it was AGREED that OW would:
© come back to the Board with a fact list on our contractual terms
© circulate by email a summary of Bol’s Group Strategy announcements on 13 June
2018 and our take on what this meant for our negotiations
e include a “Plan B” in the next Peregrine Board report on our options should we
not to able to re-negotiate the deal with Bol to our satisfaction.
EVEREST
Rob Houghton introduced the paper, highlighting a number of issues:
¢ we had a fixed price contract with Fujitsu over the next five years but were trying
to get better value from this by trying to offset some opex spending with capex
Strictly Confidential
Board Meeting
ow
11.
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spending. To make the best use of the options available to us we needed to
increase our total contract spend by around £10 m
e we did not think there were significant procurement risks because the additional
spend related to hosting services which were within the existing scope of the
“Trinity” services. Anything outside this would have to be tendered for and
Fujitsu would need to be competitive to win any additional work
e the relationship with Fujitsu had been developing positively but we still had
concerns about their capability delivery in some areas, especially digital. They
had not performed well on agile delivery but some capable individuals had been
assigned to our account and the situation was improving (e.g. the
acknowledgement that our cloud service should be on the Azure platform and
not K5)
¢ RH was comfortable with the Azure platform but was going to link in more with
Government ClOs who had more experience of the platform. Shirine Khoury-
Haq also offered to introduce RH to people to Lloyds who worked with Azure
e RH had been concerned about recent outages. Around 2,500 branches had been
down for part of the afternoon of the previous day. The problem had been a
digital certificate that had been configured incorrectly due to human error. In
response to this we had sought assurance on the control measures they had in
place and the reasons that the problem resolution diagnosis had taken longer
than it should have
e there had been Verizon failure this morning. This was more concerning to us
than the Horizon outages. There were two core hubs in London and Manchester
but a third NetWare hub was being built that came on stream in June. However,
the failure that had occurred would not have been prevented by a third hub and
the fit for service check that was issued each morning had been green. It was
noted that the contract had been signed in 2013/14 when the trading situation
had been different and had been significantly cheaper than the next provider in
the tender process. We had already warned that we would consider going out to
tender if performance did not improve
we were also concerned about the potential loss of senior technical people as
Fujitsu switched more of its business offshore
¢ the June IT strategy discussions would give these issues a fuller airing.
In order to secure net operating expense reductions of £30m over the period
2018/19 to 2022/23, the Board RESOLVED to approve that the executive continue
with negotiations to:
1. sign contract change notes, in June, with Fujitsu to “switch” £30m of operating
expenses to capital investment and
2. sign incremental contracts change commitment of up to £10m (subject to
telecoms review and negotiation).
BACK OFFICE TRANSFORMATION.
The CFOO introduced the paper and highlighted a number of issues:
e the plan had been late, over budget and a number of things had not worked
first time. We now had suitably skilled people in post and were being thorough
in our approach. Migrating from POLSAP entailed risk and we were taking on
lessons learned from previous exercises and reporting back on this to the ARC.
A fundamental learning for us was the need to do much more testing as we
went and include much more user acceptance testing, including front line uses
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Board Meeting
12.
13.
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¢ we had been taking more people out of the business from cash and finance and
back filling these roles to allow more testing deploying people who understood
the business. All the changes had been made and end to end re-testing was
taking place
© at best the migration would be delayed until September 2018, at worse we
would need to defer migration until after the Christmas period, if we could not
migrate safely enough or quickly enough. There were concerns about using
POLSAP for longer than absolutely necessary. The funds being sought today
were to make the existing infrastructure as secure as possible
e Internal Audit and Deloitte had been re-testing the plan
e that we would need to know by July whether we would be proceeding with the
migration in September/October 2018.
>
number of issues were raised, including:
e that it was a programme management issue as well as a testing issue and
whether we had the right Programme Management resource in place. It was
reported that we had considered this issue seriously and had hired the best
resource we had been able to in December 2017
e that while we had changed our approach to testing it might not cover
everything, for example, we had not yet fully tested our interfaces with HMRC.
Rob Houghton and Shirine Khoury-Haq would discuss the migration in more detail
outside the meeting.
The Board RESOLVED to APPROVE an additional £4.9m drawdown and a potential
further £1.7m to enable the completion of Phase 1 of the Back Office
Transformation.
CONTRACTS
Print Management Contract Award
The Board RESOLVED to APPROVE the award of a two year contract fo
with HH Global including ring fencing £100k of the saving for the recruitment of
additional resource in Marketing.
POSTMASTER LITIGATION — LEGALLY PRIVILEGED
Jane MacLeod provided an update on the Postmaster Litigation and the
Subcommittee meeting held on 15 May 2018, including the sequence of trials and
the focus of each:
e the first trial (November 2018) would focus on the meaning of the contract and
the second (March 2019) on how Horizon operated
* apiece of work was being led internally on contingency planning
® we would get an updated view from the QCs in September 2018
e £3m had been spent on the case last year and forecasting £9m for this year.
It was noted that the case had reputational implications and that while there were
560 claimants in this case, in absence of a conclusive judgment, there was nothing to
stop there being further cohorts of claimants in the future.
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14. Performance Report — Health & Safety, including review of Robbery Risk and
Violence
14.1 The CFOO introduced the report and Martin Hopcroft provided an overview of the
work being done to increase security in branches, including that:
¢ violence and robbery risks were growing, even where there were limited goods
to shop lift
e we did not have a lot fogging technology in branches currently but would like
to invest more here because it had been very effective where it had been used
. our guidance to Postmasters was not to fight back if provoked but people
sometimes did when placed in that situation
® we were working with the British Retail Consortium on safety initiatives
e — we had rated 4 out of 5 on our H&S audit. Our systems were robust and we
were taking a proactive approach to investigating low level incidents.
A number of points were raised, including:
e that it would be helpful to understand how branches were classified as high risk
¢ that we should be over protecting rather than under protecting and it would be
helpful to have a count on safety measure like how many cameras were in
branches
eit would be helpful to understand the costs associated with putting cameras in
rural branches
e thata statistic of 0.3 Lost Time/ Hours Worked (LTIFR) per 1000 employees
would be considered world class. The figure for our supply chain was 0.6.
It was AGREED that the Board would receive a review of robbery risk and violence in AC/ MH (to
the network twice a year. do)
15. ITEMS FOR NOTING
15.1 Sealings
The Board RESOLVED that the affixing of the Common Seal of the Company to
the documents set out against items numbered 1658 to 1681 inclusive in the seal
register was confirmed.
15.2 Future Meeting Dates
The future meeting dates were noted.
15.3 Forward Agenda
The forward agenda was noted.
Meeting closed at 14.37 pm.
Chairman
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Post Office Limited Board Strategy Day, Session 1, 26 June 2018
Present:
Apologies:
Tim Parker, Chairman (TP) Tom Cooper, Non-Executive Director (TC)
Paula Vennells, Group Chief Executive (PV)
Ken McCall, Senior Independent Director (KM)
Tim Franklin, Non-Executive Director (TF)
Shirine Khoury-Haq, Non-Executive Director (S K-H)
Carla Stent, Non-Executive Director (CS)
Al Cameron, Group CFOO (AC)
In attendance:
Tom Aldred, UKGI (TA)
Veronica Branton, Minute Secretary (VB)
Rob Houghton, Group CIO (RH)
Jane MacLeod, Company Secretary (JM)
Cathy Mayor, Finance Director Retail (CM) (items 1 & 2)
Tom Moran, Network Development Director (TM)
Debbie Smith, Chief Executive — Retail (DS) (items 1 & 2)
Ed Tucker, Head of Network Strategy (ET) (items 1 & 2)
Owen Woodley, Chief Executive — FS&T (OW)
The Chairman welcomed everyone to the meeting.
1. Overview of Strategy days
Tom Moran provided an overview of the Strategy days. Day one would focus on the Retail
Strategy and the potential to acquire the other half of FRES. There would also be two
technology showcases. Day two would focus on the Insurance Strategy and improving IT
services in branch.
2. Retail Strategy
Conclusions of discussions
The Board supported the direction of travel proposed. Key elements in the successful
execution of a retail strategy that met our customers’ future needs were:
.
Better understanding of our customers, our network and their future requirements
(e.g. developing a geographical blueprint of where we had outlets — PO Mains and
Locals and Payzone — what services were needed, and where there were gaps)
Changing the model to introduce the new formats discussed and develop the
franchise proposition
Technology upgrades/ technological enablers (e.g. simple SSKs focussed on bill
payments and mails)
How we managed cash (providing banking services drove footfall but brought
requirements for space, training and security and the additional costs needed to be
part of our charge to the banks)
Agents: their capability (great service, great merchandisers); our proposition
(stripping out labour costs supported by self-service technology and simpler
processes; freeing up space; offering a range of franchise formats)
Retail partners/ running our own stores (the right partners for the PO of the future,
including those who could bring in a younger customer base)
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2.1
2.2
. The right products in the right places (e.g. where we sold which financial service
products)
. Stripping out cost through a combination of the above factors.
Detailed discussions on Retail Strategy:
Overview
Debbie Smith shared her thoughts and insights about the Post Office retail network having
started as CEO — Retail in January 2018. She had spent a lot of time in the business, in
branches and with externals, including the multiples. DS wanted to capture the Board’s
thoughts on the proposals for developing the Retail Strategy and the approach to executing
its delivery. The Retail Strategy wasn’t yet complete but would always continue to develop
to keep it dynamic.
DS’s approach was customer in. PO was a strong brand, value driven and with a passion for
customers and the way we worked. There was a huge opportunity to make a positive
difference for our customers but we needed to be clear about how we remained relevant to
our customers and maintained our position on the high street. The possibility of being “last
man standing” on the high street differentiated us and where Postmasters were getting it
right they were making a fundamental difference to the communities they served.
However, we were in a period of transformation. Some standard elements that DS had
expected to be in place were not, including:
¢ ease of communication with branches,
© weekly trading reports including all the relevant customer data
© consistent and high quality management of the network. While some branches were first
rate others were down at heel. We were not sufficiently customer led. Sometimes there
were two queues when there should be one. We didn’t always having the right currency
to hand in some dynamic urban areas where you’d expect that provision.
Retail was changing faster than ever. Our strategy was about catching up and developing
what our customers wanted for the future. It would be format driven, developing our
franchise capability and being best in class to create great customer experience.
Amazon and John Lewis represented good role models through offering an integrated
proposition while engaging their people to deliver a great experience.
Retail Strategy — Customer Insight
Ed Tucker presented the findings from the customer research initiated in February 2018.
This had included qualitative and quantitative research (2,500 customers online). We had
asked participants to summarise what they wanted from the Post Office and how we should
develop to achieve this. The consistent findings were:
e Convenience
e Simplicity
* Modern (and the need to modernise)
e Extended opening hours.
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2.3
The services most sought were postal, passport and bill payments. The positive associations
with PO were that it was friendly, provided great service and was trusted. The negative
associations were understaffing, queues, that it was too busy and that it lacked privacy.
Customers’ needs were very different now. Mails was still the dominant service (65-70% of
business in branch) but the brand meant little to younger consumers and they were used to
being able to do things on their phone. We needed to catch up to be relevant to that
market.
Our strategy had three key elements: Network segmentation; less is more; clear
understanding of product profitability. This would help facilitate our customers’ vision for
the future which included:
e self-service
¢ online
® core range (across all branches)
e — full range (including finance and travel insurance in a smaller number of branches).
Customer feedback was that we should set up separate POs for financial services but we did
not envisage having branches that provided FS only. PO Plus in 1,500 branches was one idea
but we’d need to understand the implications of this fully. In this model, all insurance
products, other than travel insurance, would only be sold in PO Plus.
As well as introducing different PO formats we needed to improve our offer to agents from
recruitment to on-boarding to engagement.
The dependencies on the successful execution of the strategy included people, technology
and brand strategy.
Discussion points
Customers
e If our starting point was looking at the customer and what best serves them how do we
segment our customers? It was reported that we hadn’t done much work on
segmenting our customers in Retail. The vast majority of customers coming into POs
were retail customers. If you started segmenting down into age groups etc. a lot more
work would be needed, for example, analysing customers’ needs by geographical area.
It was felt that we needed to understand our customers better because we should be
maximising profitable spend when customers were in branch or shopping with us online
and we needed to develop a structure that delivered more profitability. When looking
at a geographical area it would be helpful to understand what our partners were making
in their overall business. We know how much PO pays them, we know how many staff
they have and it ought to be possible to do some sensible modelling based on footfall.
¢ The scope of our consumer insight and how this could feed through to the relationship
managers was discussed. It was reported that we had a good basic oversight of the
network but were working on what data we held, should hold and the format of that at
the moment. For example, historically we had not captured data from agents’ calls but
were now doing so. This helped us understand things like whether a small number of
POs were requiring a disproportionate amount of support.
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e That for Millennials, Amazon’s collect plus generally came up before the PO option. RM
and their model would be important for us and PV had met with their new CEO and was
discussing these issues.
Agents/ partners
e The scope to link up with one of the major supermarkets was discussed. It was noted
that there would be issues to address where the supermarket offered banking services
we couldn’t sell our banking or insurance products there or have brochures promoting
these products in the same space.
© The footfall drivers in branch. It was noted that we had been discussing these with our
partners. It was clear that you had to be a successful retailer to make running a PO
work but running a PO drove significant footfall into your business.
e Our branches weren’t only based in retail outlets but in libraries, pubs, etc. but it
remained the case that there has to be something driving the revenue in addition to
offering PO services.
¢ What the retailers of the future would look like and who would fits into which of the
formats we were envisaging was discussed. A clear understanding of this was likely to
answer some of the millennial engagement issues.
© Some of the multiples were already showing interest in things like SSKs but we needed
to provide simpler models and sort out remuneration. Some of our competitors, like
Costa, already offered the benefits we were proposing.
¢ There was tension between the current network and what we would like our ideal
network to look like. We needed to have a compelling proposition for the retailer,
looking at which products we would offer in which formats and which retailers would be
attracted by that.
© The challenges of being a franchise provider were discussed. We had to offer an
attractive proposition to retailers but we also needed a model which could integrate well.
Many of the services we offered would need to be primarily self-service and frictionless
for the agent. If we wanted to provide cash that needed to be paid for through the
banking framework. That would leave our multiple partners better off (labour and
training were key issues for the multiples). Low cost kiosk solutions would be key to the
local offer but the challenge remained of the larger POs that weren’t profitable for us.
¢ Agents’ pay would be brought to the Board for further consideration later in the year as
this was fundamental to the development of the strategy. We could have great format
models but needed to have agents who wanted to run them. Technology and
simplification would be fundamental to driving out some of these costs as well as
reducing the number of products that agents had to sell.
© It was reported that there was a collection of things we were doing to support and
increase the capability of the agents. We still needed to improve our recruitment
process which was too slow.
© Our benchmarking on recruitment was discussed and it was noted that as well as being
slow there was a higher dropout rate than you’d expect. We were forcing people through
a single process and should switch to a risk based approach, for example speedy boarding
for agents who met agreed criteria.
e Agent pay costs would become variable if we closed our DMBs. We carried around £47m
of fixed agents’ pay currently. This included hard to place branches, for agents who had
to drive to a number of sites, and for the work we did for “Mailwork”. Part of the
challenge with agents’ pay was that increases to the minimum wage for their staff had
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reduced profits significantly and that made our simplification and technology
programmes all the more important.
Our role in supporting the merchandising capabi of the retailer was discussed. It was
noted that while running a PO drove footfall, a bad retail proposition served neither the
agent, the customer nor the PO. A consistently good retail offering could change our
numbers and level of profitability.
Format/ operating model/ network
Historically we had had a number of formats that didn’t always provide appropriately for
our customer base. In tandem with reducing the number of DMB’s, we were proposing
the development of 4 or 5 different franchise models/ formats.
That we needed to understand the commercial format properly, including if financial
service products were to be offered at far fewer branches. It was noted that we were not
proposing branch models which only sold FS products, however the proportion of FS sales
varied considerably from branch to branch. This would be plotted out to help us consider
the transition. It was noted that wherever we had travel money we wanted to be able to
sell travel insurance.
Whether we had factored in seasonality to the strategy, such as queue management,
making the network more agile with pop-ups etc. It was reported that Christmas brought
200-300% normal volumes. Our technology development would allow some sales to be
done on the network till and we could cut wait down times through enabling more to be
done online in advance of going into branch. Our operating model and cost base were
driven by maximum demand at Christmas — we needed to drive more flexibility into the
operating model.
The scope to investigate sharing networks/ share economy systems that could address
some of the volume issues was discussed. It was thought that this idea warranted
investigation.
The current PO structure was discussed. It was reported that a Main had a main counter
and a subsidiary counter and was required to staff the counter when their retail outlet
was open (which became more achievable as we drove more self-service). A Local
didn’t have a subsidiary counter; however, a lot of Locals did not operate very
differently to a Main although our rate for Mains was 30% higher. The cost of fitting
out a Main branch was a least £30k and these costs were split between the retailer and
PO. A12 month notice period was required to move from Main to Local status but this
would lead to some of those branches being unprofitable. It was suggested that we
think about we could do to mitigate the impact on a Main of changing to a Local. This
could include savings on staff costs through simplifying cash and banking, the use of
SSKs and reducing the space used up by PO which could then be used for selling more
retail goods.
It was noted that a fortress counter went into branches that were handling a lot of cash.
For some retailers having to have an extra till which also required extra space was
unattractive and could put in question our ability to be “last man on the high street”
providing cash. However, devices such as the Norwegian cash counters could strip out a
lot of complexity.
That the Payzone acquisition would give us additional outlets and we could start looking
at which stores could offer more services. The network was UK wide but mixed in terms
of quality. We needed to look at density of service requirements in particular areas and
map out a blueprint of what we needed across the country. Then we could look at what
we were able to deliver in particular areas and where there were gaps in our
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distribution network. Not all outlets would need to offer a full PO service or even be
branded as POs. A geographical sales team would be needed to support this network.
e — It was noted that first two formats proposed focussed on bill payments and customer
returns which could be delivered through efficiency and technology. If we were
planning to disrupt the system by changing the formats for POs and introducing new
technology it would be better to do this only once. How this might be achieved was
discussed. An option was to take a region, look at how many Mains, Locals and Payzone
stores it contained and how much it would cost to make the change from Mains to
Locals (e.g. buying the Mains out on a year’s contract). We would need to be able to
differentiate for customers the services we offered in different types of POs e.g. PO
Express. There can be a very different feel between POs currently and we were not
clear on our franchise expectations. The quality of people was also issue, for example
WH Smith ranked poorly on customer service. The scope to run our own PO multiples
was raised as well as the challenge of addressing whether we were operating with the
right partners to meet our future aspirations.
¢ Our cost base was discussed and whether we would start seeing the direct margin we
made on each product when we moved away from fixed pay. However, it noted that
this was complicated in practice because some costs, like the Horizon system, supported
many products.
Technology/ simplification
e The scope to test and roll out a simple mails kiosk. It was noted that there were home
shopping opportunities but we needed to work with RM on these issues.
The scope to free up space in branches and simplify staff training was discussed. It was
reported that we were contractually obliged to have mails segregation’. This was a
process cost and a space cost. Some of the rules in place with RM were complicated
and the cumulative impact of complexity across a range of services meant that you
needed specially trained staff. DS noted that her preference would be for Postmasters
to have a longer training period and to get them really engaged. But for other staff,
online training that enabled them to sell a small range of products might be sufficient.
© The scope to drive down the cost of SSKs was discussed. Each machine cost;
moment. We were looking at procuring the third generation of self-service machines
currently. Having a simpler, cheaper, easier to operate kiosks would offer us significant
advantages. POs which had this functionally internationally used them mostly for mails
and had skipped the legacy technology.
Costs
e¢ We still had high costs in the business that produced minimal return. DS was working
to understand these costs and see how they could be stripped out. We needed to focus
on what we were good at, where we could get sufficient market share, and where we
were commercially viable.
1 It was noted that we could review our operating model. E.g. we could look at having one mail bag
that could be taken way to be sorted.
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3.2
Products
e Whether it still made sense economically to sell life insurance. We needed to be sure
that each business was doing the right thing economically and charging the right costs to
one another
e That access to banking services could become more important than access to mails so
was a key issue for us.
e The profitability of the products offered by PO was discussed because it looked as
though about 20% of the products drove about 80% of the profit. However, it was
reported that almost all of the products offered made some contribution.
e Product lines and the quality of service were also critical. We had worked with Co-op
recently in two of their stores with POs and had managed to increase their income.
Customers would always want choice but we needed our standards to be consistent.
We needed to develop leadership and build and maintain relationships across our
network. There should geographical relationship owners who would make visits and set
up regular conference calls that agents could join.
Brand
¢ Whether customers still confused PO and RM? It was confirmed that this was true but
that the services provided were so linked that only very heavy brand advertising would
distinguish us and the association with RM was broadly positive.
FRES
Overview
its UK business was on
They had ambitions t
I We needed to better understand
FRES delivered a solid performance but was struggling with depressed exchange rates and
BREXIT. It was the market leader in travel money but th. ‘ket was changing fé ith
number of fintechs operating. We had done some ~ IRRELEVANT
if We also needed to
was also noted that we had limited options to!
Bol.
IRRELEVANT
Work be done on how the business could be buil
PIRRELEVANT A full recommendation would be brought back to the Board.
Discussion points:
e We needed: a) a proper understanding of the current marketplace and how p!
was; b) an understanding of future profitability; and, c) a clearer picture of thei!
well as thei
and restrict our
OW reported that analysis would
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be brought back on these issues, noting that there was an opportunity for the business
to rationalise its approach and pricing strategy which could weed out some of the
smaller players. FRES’s market share was 24/ 25% and the next largest player was M&S
with 11%.
© FREScouldbea; IRRELEVANT _
H IRRELEVANT i
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Board Strategy Day, Session 2, 27 June 2018
Present: Apologies:
Tim Parker, Chairman (TP) Tom Cooper, Non-Executive Director
Paula Vennells, Group Chief Executive (PV)
Ken McCall, Senior Independent Director (KM)
Tim Franklin, Non-Executive Director (TF)
Shirine Khoury-Haq, Non-Executive Director (S K-H)
Carla Stent, Non-Executive Director (CS)
Al Cameron, Group CFOO (AC)
In attendance:
Tom Aldred, UKGI (TA)
Veronica Branton, Minute Secretary (VB)
Rob Houghton, Group CIO (RH) Items 1. & 2.
Jane MacLeod, Company Secretary (JM)
Tom Moran, Network Development Director (TM)
Owen Woodley, Chief Executive — FS&T (OW) Item 3.
1. IT demonstrations
11 Overview
Rob Houghton provided an overview of the IT self-service app that had been piloted and
showed the feedback videos on before and after IT service provision.
There were some common complaints about IT support, including the length of time it took
to get through to the support desk, not always getting the right support when you did and
not knowing when an engineer would arrive’.
The app had been rolled out to 100 branches. There was still manual work going on in the
background but we wanted to roll the app out much further. However, we were likely to hit
a point at which some Postmasters didn’t want to download and this was part of a bigger
issue about not be a true franchise at the moment.
We faced challenges in our communication with agents. Not all were on-line. Their service
needs were different. We were still quite paper based. In time we needed to create one
access point through one app for agents. Only shutting down other channels would create
significant business benefits.
We had spoken to agents about what would make the biggest difference to them. Being
able to manage stock was their number one ask. The app allowed a number of sources of
data to be bunched together and was independent of Horizon so was a way of
communicating when there were problems with Horizon.
We were not far off being able to say this was how we were going to deliver IT,
communications and training. That would be much better for agents but we needed to give
them a lead time.
+ Being able to track where the engineer is through the app should cut calls to ATOS.
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1.2 Discussion points
e Whether it would be possible to show serve time/ queue times through the app. It
was reported that we don’t have a way of recording this for all branches currently.
However, the data elements within the app could be added to, removed or customised.
We knew how many people were transacting at a branch which provided a proxy for
queue times. While having cameras in branch could be useful for understanding queue
times/ customer satisfaction this bore a high infrastructure cost.
e — It was reported that one of our priorities was for agents to be able to order notes and
coins online which they currently had to order through a Call Centre in Bristol. The
cash management system would count everything automatically but the first step
would be to consolidate our call centres. We had written to about 3,000 agents
requesting excess cash back and this exercise had shown that a lot of agents didn’t
understand how the system worked and so there was a drive to communicate more
and better.
e It was felt that in our conversations with agents we needed to avoid a “centre knows
best” approach through listening to agents and understanding their needs properly.
«The pros and cons of giving agents equipment, such as an IPad, to make sure all could
access on-line resources was discussed. The cons were cost and ongoing support. It
was suggested that charging a lease fee could drive a feeling of ownership and some
phone companies would provide free handsets if the individual subscribed to a contract
for a specified period.
a IT Strategy
2.1 Overview
Rob Houghton provided an overview of our IT Strategy covering service issues and supply
strategy; Fujitsu; architecture strategy. We had made some significant changes but still had
a long way to go. We were currently facing the challenge of moving from one supplier to
four. The roll out of new counters should have been completed by the end of September,
POLSAP migration would then start and we had begun to open up our IT architecture.
Service issues and supply strategy
- The Horizon service had been good although we hadn't yet been through a test of a
complete shutdown of the system.
- The service provided by ATOS had been pared back.
- Computacentre’s performance was poor on both execution and delivery. They
provided all our desktops and laptops and some administration. They had not
delivered on their PCI obligations and we were now exchanging legal letters. They
should have been PCI compliant by December 2017. Having failed to meet this
deadline we had been expecting them to get their PCI Certificate at the end of July
2018 but had been notified of further delays.
- Verizon was flying over their Group CEO to meet with PV and RH this week and they
were now responding positively to our service improvement requirements, including
investing in a third data centre which should give us greater resilience. Verizon would
be making retrospective service credit payments for outages and we would be
negotiating strengthened SLAs with them. However, it was noted that they had been
within their contractual SLAs to date.
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It was noted that there were not a lot of viable alternative providers but that there
had been an unacceptable level of outages in the last few months. Talk Talk provided
the ADSL lines into branches and Verizon managed this third party relationship. The
network infrastructure was poor and lacked resilience. We needed to talk to Verizon
about the suppliers they had chosen.
If Verizon started providing a really good service for us we could be a reference site
for them.
Security
It had been difficult to get Fujitsu, Verizon and Accenture to feed in their event logs but this
would start happening this week. This would lead to a lot of false positives over the next
few months but that would settle down. The final pieces of work had still to be done. We
would be using dark trace machine learning to predict odd patterns in the network. A Red
team review would be carried out to try and hack data to test our security. This would help
expose the gaps we had and would raise the security understanding across the
organisation.
Architecture Strategy
RB explained that we had services and micro services”. Micro services would go into
Horizon. Horizon was a transaction database but we were opening it up and building in
different functions, for example bill payments. Our first task was to get clarity on what we
wanted to sell and where. The Customer Hub work was a precursor to HNGT which would
sit on top of the Horizon system. We needed to tackle what we would do about Horizon at
some stage and this would remove our dependency on Fujitsu. We would be migrating all
the back end services into the cloud (Microsoft Azure). However, we would not be taking a
big bang approach because migration was a risky process. We needed to be clear about
what was going where and make it modular (e.g. a database for retail). We had built in the
right to buy the intellectual property rights from Fujitsu.
Fujitsu update
The Opex figures for the next four years stood at £141m and the capex at £54m. The
negotiations with Fujitsu to change this position had been challenging but we wanted to use
the capital in a better place and were aiming to move to a verbal contract of £105m spend
on opex and £101.5m on capex. HNGT, portal, and Belfast could all feed into that spend but
we wanted to spend most of it in the next couple of years. The capex right off would be in
5/6 years.
A new procurement process would need to start in 2021 and we should make significant
savings as we moved to a new contract. We needed to complete the first stage and then
look at the future migration issues next year. We had three years to determine our strategy
to move away from the current arrangements while making sure that service levels didn’t
drop off.
RH took the Board through the figures for 2020/21. £65.1m had been forecast originally
but that figure had increased by around £10m. The difference included PO growth of £5.4m
an extra £3m to Fujistsu and indexation of £1.6m which had been missed from the original
2 Single function, secure, possible to be exposed to the wider world to build apps etc.
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figures. However, we should be able to reduce the gap between the original forecast and
the new forecast by 2020/21. The cost of counters had come down but counter
rationalisation still represented a big opportunity for reducing costs. This could include
removing some counters and replacing them with simplified kiosks. We needed a flexible,
cheap way to get rid of redundant counters.
Points of discussion
e@ Whether we could terminate the contract with Computacentre given their failure to
deliver PCI compliance and the reputational risk this posed for us. It was reported that
there was a high termination fee attached to the contract and we would need to have
cause to terminate but we were driving them hard.
e Whether we should announce the next phase of our technology rollout/ approach once
we had completed the counter transformation in September 2018, giving notice if we
needed to charge more for the service we provided in future. We wouldn’t have needed
to have completed the work at the time of the announcement.
© That we should be looking at things that made a difference to our cost structure and
optimised our franchise in the relatively short term. For example, how far off are we
were from getting a kiosk that was cost effective and did, say, 80% of what we might
want it to do? Was there scope to put a branded simple kiosk into a major supermarket
with a parcel drop? Could we have simple kiosks outside the existing PO network (e.g.
label printing; parcel collection and delivery; space to store the items)? Should be taking
an area and piloting these ideas? It was noted that the procurement process for new
SSKs would take a few months but that we would need that time to work through all the
requirements and scenarios.
That we needed to analyse an investment in cash machines carefully looking at how far
we would move to being a cashless society in the next 3-4 years.
© Whether we had the people and skills set we needed to drive the automation/
technology catch up required. It was reported that the team at 101 which had been
working on Customer Hub brought many of these skills. It was suggested that it would
be very helpful to pull together a small team who had the expertise to identify off the
shelf items that could be plugged into the existing business and were focussed on
stripping out excess costs in the system for us, for agents, in the network. AC reported
that a project had been initiated to strip out failure demand across the back office. Some
of this would be through automation or robotics, some changing where things were
routed, some doing things differently.
¢ The position with “trapped” branches was discussed. It was reported that we put in
temporary operators in those branches where we were able to.
e That when the ATM Strategy came back to the Board we also needed to look at our
whole cash strategy (Action: DS). It was noted that ATMs could do more than deliver
cash.
e The rights to buy the intellectual property rights for Horizon were discussed. S K-H and
RH would discuss this further to consider the documentation requirements given the
diminishing number of people who would understand the system architecture. S K-H
also had experience of how the regulator could help get a supplier to modularise and
document the systems so that the intellectual property rights were viable. They would
also discuss Portfolio delivery risk and cyber security. (To do: S K-H/ RH)
e It was noted that we had defined our risk appetite on cyber security, that there was a
gap between this and our current position and that a cyber security awareness campaign
was going to be rolled out.
e It was noted that it was difficult for Boards to assess cyber risk so clear
recommendations were needed. The Board needed to understand the risks (regulatory
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and other), what enhanced security would look like, the costs associated with this, the
worst case scenario and a more realistic approach.
e The work on HNGT was discussed. HNGT should reduce queue times and allow us to
adapt to customer requirements quickly. The training requirements were less onerous.
The changes required were taking place incrementally and the ordering was business
driven.
It was AGREED that an item would be included on the Board agenda about the costs
associated with rolling out cheaper, less sophisticated kiosks (the Post Office Express
Model) once we had worked through the options and had processed our take aways from
the visit to Norway to see their banks’ cash counter technology. It was noted that this piece
of work would not be ready for at least a couple of months. (Action: RH/ AC/ VB)
a Insurance strategy
3.1 Overview
Owen Woodley provided an overview of the PO Insurance business. The business was
performing well, we had identified the immediate priorities to deliver the existing plan but
had five recommendations for future development.
Rob Clarkson explained the rationale underpinning the strategy proposals. The business
was established, we were seeing benefits coming through on revenue and business growth
but needed to grow our ambitions. We wanted to increase our share of the value chain and
had been looking at what it would take to grow significantly. We were looking to build out
our home insurance model and were well advanced in finding the capacity provider. By the
end of year we would have reviewed our non-core business like car insurance, assessing
whether or not they were detractors to our core business.
In considering growth options we had thought about whether we should move into owning
the whole value chain (i.e. include underwriting function) but this was not seen as the right
stage of our development to do so.
The PO brand brought us a lot of value and would help us where we wanted to be a
disrupter. One part of this was the potential acquisition identified which could help us to
become number 1 in the travel insurance market.
The 5 year plan was clear: get deeper into value chain; take more control; start to do more
distribution and grow significantly.
The acquisition of a travel broker which specialised in travel insurance for older customers
and those with impaired health was proposed. We hadn’t yet undertaken due diligence.
We wanted to be able to attract the part of population that was travelling more and had
more sophisticated insurance needs. Our average premium was around £35 but the broker
we were looking at buying had an average premium nearer £100 (albeit with a higher claims
level). Once we had capability at product level and had increased our digital marketing we
should be able to attract more customers. Acquisition rather than investment was favoured
to allow us rapid scale of market entry. Tiff was the managing agent behind the provider
we were seeking to buy and they also managed our complaints which were in line with
industry averages.
3 Making changes to the “back end” of Horizon could take months.
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3.2 Points of discussion:
It was noted that we were not taking any underwriting risk at present. We had an
arrangement with Aviva on life insurance. Control over the proposition and being able to
simplify the customer journey was important for us.
What dependency the plan had on branches. It was reported that 500 branches could
sell the over 50s product over the counter. There was a real time interface with Horizon
for details of a customer logged into the system but it was noted that the volume of
consumers buying insurance through sites like Money Supermarket was growing
exponentially. We didn’t need lots of branches with consulting room space.
Loss ratio of our travel insurance products. It was noted that the loss ratio was around
65% of net costs, rising to around 85% on impaired but with these policies attracting a
much higher premium. Bringing the two books together should give us a better view of
the blended costs.
The rationale for buying a complete entity rather than just the book of the travel
provider we were seeking to acquire. It was reported that the book alone was not for
sale and we were also looking for the capability that came with the business. We had
made initial advances to the owners who were keen to sell but had been speaking with
other potential purchasers. The accounts of the provider had not been audited for the
past few years, we needed to look at security issues and we needed to make sure we
could lock in the skilled people essential to the business. KPMG would be supporting us
to do the due diligence work.
Motor insurance was discussed. It was noted that this was one of the products we
would be reviewing because we were only a small market player. The whole market was
under pressure with low margins and the move to automated or semi-automated cars
meant that the market was likely to change significantly. However, as we were
considering disruptor models, such as a app for the millennial renter market, we would
need to consider whether not providing some form of motor insurance (e.g. for
temporary car hire) made our overall proposition less attractive. We could consider
including motor insurance as part of a disruptor product rather than a product line in its
own right. If we wanted to move out of motor insurance our single arrangement with
BGL ended in September 2019. We had about 110,000 existing policy holders and we
could go out as a portfolio sale.
The fit of the PO brand with millennial renters. It was noted that this group were high
users of EBay and required access to mails. It was AGREED to go away and come back
with a mock-up of a disruptor product for millennials (Action: RC).
It was noted that when consideration had been given to doubling our EBITDA again we
had discounted becoming an underwriter on home insurance because we did not
currently have the scale or differentiation of risk selection. Only being a distributor
limited capability to generate profit so being able to provide underwriting services would
be beneficial in the longer term. To get to this point we would need to have run an
insourced intermediary model for 18 months or so. We had spoken with some potential
providers and recognised that choosing the right underwriter would be vital. We wanted
a high degree of transparency on the financial terms and how the net rate was set. We
then needed to develop capability and understanding of providing the service (focusing
on two or three areas) without taking the regulatory risk.
The scope to partner with an aggregator. It was noted that we had looked at this at a
high level but had not proceeded further than this because some of our major
customers, like British Gas, were disadvantaged by the aggregator model.
The Telco business was discussed and whether we thought we would get value in the
market if selling. It was reported that Sky had indicated they'd be interested in a broader
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conversation about the possibility of being a thin brand layer. There were some
concerns about pricing issues across the market. The business was making a £30m
contribution at the moment which was good value for return but we didn’t know how
long this would last.
3.3, Outcomes
The Board supported the propositions and recommendations set out in the paper that:
1. POI was established, had grown capability and was well itioned to deliver on its
ambitious current strategy growing contribution to over;** “lwithin the next five years
2. POl should aim to become the largest retail Travel Insurance distributor, accelerating its
growth thi increasing annual contribution
by! IRRELEVANT I
3. POl had the potential to disrupt the market and should seek
develop a prototype product by March 2019 with the intention of delivering a minimum
oft. IRRELEVANT >
4. POI should continue to build the internal intermediary for Home Insurance and return to
the Post Office Board at a point where we could demonstrate an improvement in risk
exposure when considering further involvement in the underwriting value chain.
Becoming a Home Insurance Underwriter had the potential to drive an additional
annual contribution.
5. POl’s Board had received and discussed analysis and research relating to the strategic
proposals and were supportive of the direction and recommendations made in the
report.
6. the existing strategy together with the additional options recommended should triple
PO's current annual contribution from under!
subsequent move into Underwriting could increase this contribution to over }
annum.
It was also AGREED that Owen Woodley would come back to the Board with an integrated
view of FS and Telco, working with Debbie Smith would make sure that the insurance
strategy and the retail strategy were integrated. (Action: OW/ DS)
The Chairman noted that the team had responded convincingly to the challenge posed to
them last year. The ambition to grow the insurance business and a strategy for doing so
was now in place. The Board was supportive of the strategy but had wanted to make sure
that the rationale had been tested fully.
4. Closing comments
The CEO noted that there was a lot of horizontal change across the business. This brought
challenges, as had been set out in the cover paper, but we had brought proposals to the
Board that we thought we could achieve. Programme planning/ capability and the capital
spend position would be indicators of any overstretch.
Board Members had confidence in the Executive Team, their teams and the business
structures to help deliver the strategy, the key strands of which were:
¢ removing DMBs
e finding self-service/ automated solutions for simple transactions
© getting the Fujitsu partnership right and going in the direction we wanted in the longer
service to remove our dependency
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© carrying out the insurance developments discussed
e developing the Banking Framework
© cutting out costs at HQ.
Some of these initiatives would happen quickly, some would take longer but it was
important to have scale of ambition.
The Chairman thanked everyone for their contributions and particularly the presenters and
the teams which had demonstrated the apps.
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Post Office Limited Board Actions as at 25.07.2018
1. FINANCIAL It would be helpful to receive more information and ‘Al Cameron Open
PERFORMANCE REPORT graphs that showed the indicative growth and
profitability of the business looking at performance for
the previous period and where we were heading. It was
suggested that this could be structured like a balanced
scorecard looking at each product group.
2. FUTURE OF BANKING It would be useful to have a refresher on ATMS and the Martin Kearsley September 2018 Report to go to the Board in Open
FRAMEWORK history of POCa before coming back to the Board on our September.
developing strategy on these issues
3. PEREGRINE UPDATE.
(a) Come back to the Board with a fact list on our Owen Woodley September 2018 To be added to the Peregrine report Open
contractual terms to the Board.
(b) _I Circulate by email a summary of the Bol’s Group, ‘Owen Woodley I June 2018 Done. Note circulated on 18 June Closed
‘Strategy Announcements on 13 June 2018 and our take 2018.
on what this meant for our negotiations
G) Include a “Plan B” in the next Peregrine Board report on ‘Owen Woodley I September 2018 _I To be added to the Peregrine report Open
our options should we not be able to re-negotiate and to the Board.
deal with Bol to our satisfaction.
1. FRES IRRELEVANT Owen Woodley I July 2018 Update to July Board Closed
(We needed: a) a proper understanding of the
current marketplace and how profitable it
was; b) an understanding of future .
profitability, c)a clearer picture of thefmrecevanry
recevante and how this could be funded and;
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Post Office Limited Board Actions as at 25.07.2018
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d) an understanding of the impact of
2.b
Retail Strategy
The ATM Strategy should factor in our whole
Cash Strategy
(We needed to analyse an investmentin cash
machines carefully looking at how far we
would move to being a cashless society in the
next 3-4 years)
Agents’ Remuneration
Rolling out of simple SSKs
(It was AGREED that an item would be
included on the Board agenda about the costs
associated with rolling out cheaper, less
sophisticated kiosks (the Post Office Express
Model) once we had worked through the
options and had processed our take aways
from the visit to Norway to see their banks’
cash counter technology. It was noted that
this piece of work would not be ready for at
least a couple of months.)
Debbie Smith
September 2018
Overarching update paper to
September Board
Paper to November Board
Timing TBC
Open
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Page 2 of 3
Post Office Limited Board Actions as at 25.07.2018
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FS&T Strategy in branches Owen Woodley/ September 2018
Debbie Smith
Owen Woodley would come back to the
Board with an integrated view of FS and Telco,
working with Debbie Smith to make sure that
the insurance strategy and the retail strategy
were integrated.
Page 3 of 3
Overararching Retail Strategy
update to September Board to
cover FS&T Strategy in branches.
Open
POST OFFICE
POST OFFICE BOARD
CEO’s Report
Author: Paula Vennells Meeting date: 31* July 2018
Executive Summary
Context
Our target for 2018/19 is to achieve EBITDAS ot
Our areas for future
focus will be:
Our key market ambitions
To remain number one in letter and parcels
To build our position as a major challenger brand in financial services
and telecoms
To be the UK’s main provider of cash services and remain #1 in
travel money
To lead the market for digital identity services
Our key measures of success
Grow our network, doubling the number in town and city centres
Become the partner of choice for convenience retailers
Demonstrate digital innovation in every transaction
profit to reinvest in our business and communities
Our five priorities to deliver these outcomes
vawnNe
Simplify the retailer proposition
. Build flexible and secure IT
+ Modernise our products and services
Digitise and optimise the business
Trust our people to find the best way to do their jobs and help our
customers
Input Sought
The Board is invited to note the report and highlight any issues where a future
discussion would be welcome.
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PAGE 1 OF 7
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The Report
Looking Back
WHAT HAS GONE WELL?
¢ Financial Performance
— YTD Trading profit was £ £2m better in the prior year. Trading profit
was ahead of plan in P3 (‘8 ) and YTD Ye fal , timing differences,
with costs coming in later t planned account ft YTD.
— Revenue and profit are adverse to plan, by £1.6! , due to the Telco issue.
Otherwise revenue was £0.9m adverse in P3 at and £0.2m adverse at
TD.
— Net assets and funding were stable in the month at ji"
respectively.
e¢ PO Travel app
— Post Office Travel App launched in June, with: egistered users, and
averaging around;«*“"; Travel Money Card links p y. The app is continuing
to attract several hundred new customers every day. We will not know full
performance impact until we are able to recruit customers online and the Fres
app is fully removed later this year - but early signs are good.
¢ Simplification
— We have further simplified the daily ‘branch balancing’ process, saving agents
around 17 minutes a week through reduced printing and streamlining the
process. The new approach went live in July and has been well received by
postmasters.
e Branch upgrades
— Branch Counter hardware deployment continues to target 70 branches a day
with 16,500 counters now complete, running at 95%-+ success rate; and due
to complete September 2018, with a small number of cancelled sites moving
into October.
« Acquisition of Payzone
— We announced our intention to acquire Payzone’s bill payments business.
Positive feedback was received from a number of stakeholders, including
Nicky Morgan, Chair of the Treasury Select Committee, the Association of
Convenience Stores, and the NFSP. Importantly, British Gas have delayed
their tender by 12 months. Our communications plan worked as intended,
flagging the bid as a notable development, but without fanfare, which might
otherwise have detracted from the CMA approval process. We are responding
to questions from the CMA, who are data gathering pre-notification.
e June Board Awayday
— Thank you for your participation in our recent Board Awayday. Your challenge
and feedback were appreciated by the teams that took part; we will update you
via board reports and discussions as usual.
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POST OFFICE PAGE 3 OF 7
° Mails
— Post Office YTD Mails performance is on budget with volumes slightly up YOY.
The key areas of growth are Returns +33% and Local Collect +27%.
« Ofcom complaints report
— Telecoms quarterly complaints report published by Ofcom (Jan-Mar 18),
published record low levels of 12 per 100k customers, this was 21 in the previous
quarter. The improvement is a result of more focused and data-led complaints
handling. (Reported stats may worsen next quarter as a result of price rises and
Galaxy but we hope the new process will prevent a return to previous high
levels.)
WHAT HAS NOT GONE WELL?
« ITissues
— There were several major incidents during June across the IT estate,
impacting Back Office, Contact Centres and the branch network. All impacted
suppliers are working on service remediation plans, most notably Verizon. I
met with George Fischer, Verizon’s Group President, to discuss a better way
forward and a working plan with stronger commitment and improvement from
them. We continue to consider alternative strategies, should they prove
necessary.
— The weekly call with the FJ Group CEO has now moved to fortnightly, we are
close to signing Everest; our next step is to improve ways of working and
increase pace (on their side).
* Travel Money
— Our overall travel money performance continues to be under pressure,
showing a 9% YOY decline in aggregate at this early point of the summer
campaign; travel money online (TMO) is +50% YOY but is still a relatively
small channel. Overall our income gap to budget i: tI YTD as the retail
decline had been anticipated.
— Key challenges relate to TMO where we had an aspirational YOY target
increase of 24%. Our actual TMO sales although well above last year, are
c30% behind budget YTD; we have recently implemented improved pricing to
compete harder with the supermarkets. The potential impact of the TMO (and
lower in branch travel money card sales) across the full year would be
in gross income.
— There is strong anecdotal evidence that our performance trends are in line
with the market - for example, we understand that Travelex’s key clients are
seeing a similar pattern. Recent updates from the larger tour operators
indicate that they are struggling to shift inventory with both TUI and Thomas
Cook announcing discounts on a high volume of late holiday bookings and
many domestic operators like Parkdean reporting record occupancy levels. We
are continuing to work closely with FRES on mitigating strategies.
e Retail underperformance
— Retail revenue was -£0.7m adverse driven by POCa revenue (-£0.4m), due to
slower than expected decline in the number of active accounts (fewer
accounts trigger a higher payment threshold). In addition, below budget ATM
volumes /availability (-£0.2m) and Payment Services timing (-£0.2m),
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POST OFFICE PAGE 4 OF 7
however these were partially offset by increased banking services volumes
Looking Ahead
FUTURE FOCUS
« Government Affairs
— Kelly Tolhurst MP has been appointed as Parliamentary Under-Secretary of
State at the Department for Business, Energy and Industrial Strategy, and is
likely to take on the Postal Affairs brief. Previously she was PPS to Greg Clark
when he was Business Secretary. Once officially confirmed, a full induction to
the Post Office will commence.
— The BEIS Partner Organisations forum was held earlier this month, jointly hosted
by the Permanent Secretary and the Secretary of State. We discussed Brexit, big
data, and progress on diversity and inclusion. Brexit dominated. I will update at
the meeting.
— ImetLord Gardiner, Parliamentary Under Secretary for Rural Affairs, about
proactive management of our rural network (opening and closing branches to
manage changing customer demands). It was a productive meeting; he is
very supportive of Post Office and the contribution we make to rural
communities. But he is keen we maintain absolute numbers in rural areas.
(This is not always easy; Payzone may bring some relief.)
¢ IT future plans
— We continue to improve our risk position with successful completion of a
Disaster Recovery Exercise carried out at ComputaCenter’s Data Centre, which
proved we can recover all CC’s IT Services (vital services such as Active
Directories, Office365, email, SharePoint).
— The Security Operations Centre (SOC) has begun receiving log sources from all
partners (Fujitsu, Computer Centre, Verizon, Accenture). These initial log
sources are being tested and reviewed. As a result, our Security Operations
Centre will now receive automatic feeds relating to all security events (e.g.
unusual firewall behaviour) from FJ, CC, Verizon and Accenture systems, which
will ensure we are aware of any security issues in our estate from earlier,
enabling us to take quicker remedial action if required.
— Post Office continues to progress the in-sourcing of our IT Supply Chain
management from Atos, which will enable us to take on the relationship with
suppliers for performance, security and escalation management. As
demonstrated to the Board, Post Office is standing up a central ‘Service Now’
platform, to enable end user self-service which will be rolled out in Q3.
« Lottery - new IT roll out
— We have started the next phase of IT development, showcased to the Board at
the Away Day. This will deliver Lottery Direct Settlement through retailers’ tills
by the end of October, replacing the current, flawed process. This work will
of at-risk EBITDAS. Initial feedback from McColls and Co-op,
the largest multiples, has been positive. This work is being delivered by a joint
Retail-IT-Fujitsu team using agile methodology - we will update the Board in
September on this approach more broadly.
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POST OFFICE PAGE S OF 7
« Telecoms
— The PWC Audit of Telecoms Accounting Phase 2 work has commenced to
ensure that all Telecoms financial reporting is accurate and fit for purpose.
The Fujitsu accruals reporting issue created a £5.1m challenge to our 2018/19
and we will continue to work on options to close that risk. (Additionally, whilst
we don’t anticipate any further issues of this nature, the CFOO will review
commercial control metrics for other product reporting areas this year.)
e Peregrine
— Bol Group has now appointed a lead negotiator from their Dublin team who
will be based in London to drive the negotiations from their side. They are still
reviewing advisory options but are likely to appoint Deutsche Bank shortly
(their advisors in the run up to their recent Investor Day). They have now
established an internal steering group for Pere
Ss
agreement.
Fenchurch will be acting as our advisors.
- remain unchanged.
« PO Insurance
— Planning is now well underway to deliver the strategic initiatives set out at the
Post Office Board Awayday. KPMG have been appointed as specialist advisors
on the potential TI acquisition.
« Royal Mail
— Tim and I had dinner with Peter Long, Chairman, and Rico Bank, Group Chief
Executive of Royal Mail last month. It was a positive meeting, however with
the recent management changes, more discussion is needed. Debbie and I
met with Sue Whalley, CEO of Post and Parcels in June, we have a follow up
meeting scheduled in August.
« Identity Services - International Driving permits
— As you may have seen in the press last week in the context of coverage on
Brexit contingency planning, the DVLA have asked us to take on sole
responsibility for issuing International Driving Permits (IDPs) in the UK from
February 2019. We already offer the service in 100 branches (as a sub-
contractor to the AA), issuing around 100,000 IDPs a year. Under the new
arrangement we would take on full responsibility for the service across branch,
digital and postal channels, displacing the AA and RAC.
strengthens ‘our rélationship with the DVLA (providing leverage for forthcoming
negotiations to extend our vehicle tax and driving licence services), and
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POST OFFICE PAGE 6 OF 7
reinforces our combined digital identity and travel proposition, alongside
Passports, travel money & insurance.
— In the event that no new agreement is reached between the UK and EU
countries post Brexit to continue the reciprocal recognition of driving licences,
demand for the service could increase significantly. At the maximum end this
could result in 7 million annual transactions for the Post Office in a ‘hard Brexit’
scenario.
— To cope with this potential additional demand in the first phase we will extend
the service to around 2,500 branches, but with the option to increase to over
4,000 if that proves necessary. No new branch hardware is required, and no
changes are planned to Horizon.
« Identity Services - other updates
— Development work is continuing with Gemalto and Accenture in preparation for
the launch of our new passport Digital Check & Send service, with roll-out
across the 730 AEI branches expected during September and October. The
delay in launch was required to incorporate further changes to the customer
journey requested by the Passport Office (HMPO) and to correct an issue with
Gemalto’s initial software release which caused temporary disruption to our
existing UKVI and DVLA services.
— Our GOV.UK Verify service has continued to trade strongly in 2018/19, with
our market share increasing_to over 50%, generating 50k customer
acquisitions per month andi "I of profit contribution by the end of week 17.
We are running targeted social media advertising to raise awareness of the
Post Office service for relevant demographic groups throughout the year,
starting with Universal Credit customers.
— Work is continuing to develop the commercial proposition for digital identity
beyond government. Prototyping of the new product is underway, linking to
the Post Office’s travel range (passports, money and insurance) and enabling
individuals to prove their age or identity in a retail environment (including Post
Office and Payzone branches) or on a peer-to-peer basis. Martin Edwards will
be in touch to demonstrate the prototype to Board members and discuss our
latest plans for developing the external market; we will liaise with your offices
to schedule these sessions over the summer.
« Christmas planning
— Our Christmas planning has started in earnest - we've introduced a
“familiarisation day” to support all colleague in advance of going out to work
in branches in December. The idea is to ensure all colleagues are made
aware of new products, offers, regulations and the ever changing branch
environment ahead of spending supporting branches during our busiest time
of year; and to listen to customer feedback in a less pressured context.
¢ Improving financial controls
— As part of our continued efforts to improve our financial controls for change
activity, we have reviewed financial tolerances applied to approved business
cases. For Board approved business cases, work will continue unless we
forecast:
- a 10% or more increase in cost
- a15% or more reduction in Net Present Value (NPV)
In such instances we would seek Board re-approval.
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« Personnel changes
— Mo Kang officially starts on 3™ August as Group HR Director, replacing Martin
Kirke.
RISKS OR CONCERNS?
e Postmaster Litigation
— A verbal update will be provided in the Board meeting.
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POST OFFICE LIMITED PAGE 1 OF 6
BOARD DISCUSSION PAPER
June 2018 (P3) - Performance
Author: Micheal Passmore Sponsor: Alisdair Cameron Meeting date: 31 July 2018
Executive Summary
Context
At the end of P2, trading profit wa:
ahead of plan. Funding headroom
The P3 plan had revenue offi T! and a trading loss of: *!, giving a YTD trading
Questions this paper addresses
1. What is the financial performance in P3?
2. What are the key areas for over and underperformance against budget?
3. Does the performance highlight any concerns over future delivery?
Conclusions
differences that are expected to reverse.
In trading, two significant trends are expected to be temporary. Verify is trading
“I below plan YTD but we expect account number reductions to trigger a
contractual rate increase from P4.
Underlying, Travel Money and Moneygram are trading below plan b'
in the month. We expect these trends to continue and are in discussions with
FRES about online volumes. The underlying Telco business is behind on customer
numbers and Average Revenue Per User (ARPU) showing ! gap in P3.
Performance focus is on travel, agreeing a new plan for telephony, remediating some
challenges in the full year IT costs forecast and ensuring that we get the right cost
trajectory into next year.
srevevant; ADOVe the minimum target of i
Balance sheet headroom in P3 was}
Network numbers (May) were 11,608, being 108 above the commitment and an
increase of 60 compared to year end.
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YTD Change spend (Capex and Exceptional) was ine zs } behind budget due
to delays in project mobilisations. This will not have an impact on in-year benefits
from major projects and is the subject of a Q1 report to the Board.
Input sought
The Board is asked to note the financial performance and agree on the Scorecard/KPIs
proposal for 2018/19.
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The Report
Period 3 Financial Performance
em
Actual Budget Variance YoY Actual Budget Variance YoY
Retail
FS&T (incl. Insurance)
Telco overstatement i
Identity i
Supply Chain/Other :
Total Revenue i
Cost Of Sales :
Net Income
Agents Pay
—~ IRRELEVANT
Other Income
Trading Profit H
‘Network Subsidy Payment}
EBITDA : :
Depreciation H
Interest H
Change Spend H
Investment Funding H
Profit On Asset Sale i H
Profit Before Tax i . }
Summary P3 Performance Overview
o the period. Adverse revenue performance was
driven by POCa revenue (F , due to budgeted volume assumptions being
lower than actual volumes. The lower volume (i ) would have triggered a higher
unit price, now expected to crystallise in P4. In add revenue was affected by
below budget ATM volumes and availability rates 7}
timing (i )
Trading profit over-performance was predominantly driven by agents’
which have moved in line with revenue and delay in project opex spend
2. FS&T (incl. PO ince and excl. Telco overstatement) revenue
performance was adverse, predominantly being driven by r
underlying Telco re
and
was
3. Identity revenue p mance was iF favourable and trading profit
performance wa: favourable to budget, continuing the positive trend in
P1 and P2. The in-month over performance in revenue was driven by Home Office
& Verify. YTD revenue i up on budget and:
4. Operating Expenses (Staff costs and Non-Staff costs) were [
favourable to budget, see analysis in note 8.
5. RES income was
Trading profit is;
7. Profit before tax i
line. This positive vari
spend.
a
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Staff costs and non-staff costs (Operating Expenses)
Period 3 YTD
Actual Budget Variance YoY Actual Budget Variance YoY
Retail i 1
FS&T H
PO Insurance Hl '
Identity
= IRRELEVANT
LRG
Communications
Central i ;
SPO I 1
TOTAL i _. I
noted in P2.
Balance Sheet & Cash Position
£m Period 3 Period 2 Movement I Movement %
Fixed Assets
[Debtors
Cash
Creditors
Pension Surplus
Provisions
(Other
Loan
Net Assets / (Liabilities)
Net Funding Position
£m Period 3 Period 2 Movement %
Government Loan
Net Funding Position
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POST OFFICE
9.
10.
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P3 cash and client debtor balances have_returned to normal level after the May
over last 12 months to reduce the cash in network. However, this has not resulted
in as great a reduction in borrowing because last year we received Government
investment funding and network subsidy on day one.
Balance sheet headroom of IRRELEVANT I increase from P12 and
year P3.
Balance Sheet Headroom
£m
Government Loan - Available Amount
Government Loan - Drawn Amount
[Headroom
Target Minimum Headroom
Headroom Above/(Below) Target
IRRELEVANT
up on prior
Period 3 Period 2 Movement I Movement %
Security Headroom
£m
Network Cash
Cash at Bank - POL *
Client Debtors
[Trade & Other Debtors - Business Debtors
Total Security
Government Loan
{Total Obligations
Headroom
Period 3 Period 2 Movement I Movement %
IRRELEVANT
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Scorecard
Post Office Business Scorecard - FY18/19
Key Performance Indicators Period 3 Year to Date Full Year
Measures Actual Actual I Target Target
FY18/19I
Deliver Profit =z
otal Gross Income (excl NSP) £m al ° olf "
Hrading Proft £m al e e Ii i
Headroom £m (vs Board minimum limit) al e Ii H
IChange benefit delivery £m (WIP) ai I IRRELEVANT : o © I firnrecevanr!
ois Tota Labels Volume m eta e olf t
has Home shoping Rats Velume m Reta ° el} I
Banking Volume (m) Retail ° off]
ciosing Telecoms Customer Base (#) (6250) I o 494,823,
Grow our Network
INumber of Branches (mth in arrears) Retail] 17,608 I 11,500] 108 I @ 11,500
Branch Avaitabily Retail] Tec I TBC Tac
Become the Partner of Choice - Customer
Digital Innovation - Customer
[Trading income from customer Hub (£m) rset] 0 0 ° TBC
lt of Registered customers on app rset] 0 o ° Tac
# of website visits at I5.421,683]5,.087.421] 405,738) @ 64,387,840
Website Conversion ratio a} 32% I 32% I 00% 3.2%
I
Line Manager index’ Al 62%
Female Representation in Senior Roles (3a & above)* I All (1.0%) 43.0%
IBAME Representation in Senior Roles (3a & above} Al (0.2%) 14.1%
Senior Vacancies filled by Internal Talent ar I 545% I s00% I 45% I @ (14%) 50.0%
Jadsence a} 31% I 33% I 02% I @ 0.0% 3.3%
safety LTIFR F820} 0.000 I 0200 I 0200 I @ 0.058 0.200
T-Line manager Index calculation Is based on the weighted avaage resulis
2. Our ambition is to achieve 50% by 2020. Full year target 043% is based on a linear increase over 3 years; this equates taeplacing 16 Males with Females in Year 1
based on 460 population. Discussion to be held over changing Seior Roles to Level 4 and above (population would decrease 250and female ratio would be 30%).
3. 6.14% is the percentage d people in the UK who describe themselves as BAME (Source: Most recent ONS Census, 2011). Our ambition is to achieve 14% by 2020.
Full year target of 11.1% is based on a linear increase over Jears; this equates to replacing 11 white to BAME in Year 1 baed on 460 population. Discussion to be
Become the Partner of Choice - Customer
11. This measures overall IT supplier SLA achievement; 10 failed SLA’s noted in May.
Of these 6 relate to Gemalto for phone calls not being answered within 20
seconds and restoration of service not within agreed timeframe. Other failures
noted are call abandonments (ATOS), timeliness of service catalogue requests
(Computacenter) and incident resolution (Verizon). All failures have a return to
green action.
Digital Innovation - Customer
12. For the number of website visits full year assumption we have extrapolated run
rate based on current performance. We are projecting 64m web visits and 3.2%
conversion for FY2018/19. This sees us delivering lower traffic vs prior year
(70k), however we are driving better quality traffic which is demonstrated in the
stronger YoY conversion (up from 2.4%).
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POST OFFICE
Appendices
1. Retail
2. Financial Services & Telecoms
3. Identity Services
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APPENDICES
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APPENDICES
1. Retail
‘Actual Budget Variance RAG Actual Budget Variance RAG. Budget
ais -Prionty Volume m
Total Labels Volume m
Is - Click & Collect Volume m
Home Shopping Returns Volume m
Ease of Doing Business wih (Eort)
customer Drivers
No. Complaints
Number of Branches (mihi T1607 11500 «4107S 77,500
FS8r Reterals Tec TC Tec Tec Tec
Nt Builes 10 19 ® @ 83 3 0 © o
Branch standards - Losses Identified in Audit 07 Tec 12 Tec Tac
Branch standards- Quality of Branch Envroment 0 «86000 00 = 00S 00
Branch Availabilty Tec TC Tec Tec Tac
[Churn - resignations 3 Tec 5 Tac Tac
Postmaster Engagement oo oo oo oo 00 00 oo
Full Year
eee, ETS
continues strong performance in P3 with 29% YoY growth and 6% ahead of budget
driven by market growth in this area. This is offset by International Priority and
Standard being adverse to budget due to reduced YoY trading volumes.
adverse due to budget vs. actual volumes. Contract with DWP.
has tiered pricing - as number of active accounts reduce, the unit price increases.
Budget assumed that we would be less than 1m accounts by P2, triggering higher
unit price, however we have remained higher than 1m threshold and expect this
to be the case until P4. Based on current trajectory, P2 and P3 downsides are
expected to be recovered over the full year.
15. Payment services wa } adverse in period due to timing of Allpay credit, but
remains in line with budget YTD.
M_performance adverse to budget b driven by below budget volumes (-
revevant; aNd availability rates 2.0% below budget for the month at 94.0%. YoY
tion in volumes of 4% which is consistent with market decline. A series of
initiatives are in flight to lift availability performance across the estate.
17. Agents Pay was (" favourable mainly due to lower trading income.
18. Operating expenses are favourable to budget predominantly due to timing delays
on project spend.
14.
16
* POCa Revenue for previous year has been adjusted to reflect the change of accounting treatment and
make revenue figures like for like comparable
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APPENDICES
2. Financial Services & Telecoms (incl. PO Insurance)
Ye
‘Actual Budget Variance RAG Actual Budge
Bute
[value of erigage Applications (Em) H re
I IRRELEVANT I ©
rave! Money On Demand sales vansacton volume
rave! MoneyOn Demand sales transaction ATV
Not Telecoms customer adstions
Net Promotor Score (Telecoms)
Net Promotor Score (Post Of$ce surance)
em
}PO Money (Savings Loans)
of this is due to Travel Hub
‘avel Money Card and Travel
19. } behind budget revenue;
revenue not yet realised. Number of transaction
Money Online also behind expectation.
20. Adverse MoneyGram variance due to volume
lower rate per transaction than expected. This has been offset by}!
of P2 invoiced v accrued amount.
21. Underlying Telephony revenue adverse variance driven by lower ARPU than
budgeted. Underlying YTD ARPU of j= below
end of P3 also down on bud by 5,250.
22. Insurance income wa adverse in the period due Travel insurance mix (-
«!) with lower branch and phone sales and higher aggregator sales
income per policy all channels. Also reduced Life Over 50s volumes } IRRELEVAN’
plan reflecting revised phasing of activities.
23. Cost of sales impacted by higher aggregator fees for Travel insurance.
24. Agents Pay was favourable mainly due to lower travel money and
MoneyGram sales.
25. Operating enses wer adverse vs. budget in P3 due to marketing spend
catch up; jiresevant; favourable YTD due to consultancy spend with expectation to use
on Eagle projects throughout the year.
26. FRES profit share reflects FRES’ actual position.
I to
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APPENDICES
3. Identity
Actual Budget Variance RAG Actual Budget Variance RAG
Licavoumes
Service Penalties i i
om2 neha Save I IRRELEVANT
LoA2 Conversion rate
LoA1 Volumes
LoA 1 Market Share
LoA 1 Conversion rate
Re-Registration Volumes i
Services Live Hl
cm periods] Full Year
Home ice
DFTIDLA
Identity Serdcos ' I
=~ IRRELEVANT I
Trading Profit H H
27. Home Office and related services performed £0.2m ahead of Budget in the month,
driven by strong performance of the UKVI BRP service, attributed to a Brexit
impact of applications being brought forward.
28. Passport revenues are on budget for the month. Although volumes are running
9% higher than budget, overall income is flat, as they are derived wholly from the
paper channel which carries a lower fee than digital. YoY, volumes have dropped
by 30% and market share has dropped 12% (to 31%) as HMPO Digital Channel
volumes continue to grow. PO Digital Check & Send is set to launch in Q3 to
address this area.
29. Verify has continued its strong growth, exceeding budget by n the month,
and + YTD. YoY volumes have more than doubled, primarily driven by
Universal Credit applicants who can now use Verify, and which commands the
higher Level of Assurance fee. Post Office continues to be the market leader with
53% market share. Marketing and User Experience activities are being
implemented to enhance performance further.
30. Recent discussions with GDS have highlighted Treasury’s endorsement for the
Verify service, which should help drive volume, but alongside expected downward
pressure on price, as the service matures.
31. DVLA revenue is flat, but underlying volumes are up on budget with increased
income offset by SLA penalties.
32. Operating Expenses are '! favourable, due to reduced postage costs from
more efficient use of supply chain.
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BOARD DECISION PAPER
Quarterly Delivery Report and Funding Request
Author: Cem Oztoprak Sponsor: Alisdair Cameron Meeting date: July 31%, 2018
Executive Summary
Context
As part of the agreed £210m investment funding for 2018-19 and 2019-20, BEIS flagged the need
for regular reporting to ensure that plans could be adjusted in the event of under-performance. It
was agreed with UKGI that the Board would approve a quarterly progress report enabling draw-
down of the next tranche of funding. It was separately agreed that, we would report on network
numbers and SGEI delivery.
Questions this paper addresses
1. What was Q1 change portfolio spend and how is that different from the plan?
2. What benefits have been delivered in Q1 and what is the full year expectation?
3. What is the change plan and funding requirement for Q2?
Conclusion
In Q1, we spent £43m out of a budgeted annual spend of £255m.
We delivered Q1 benefits of £7.9m (plan £8.2m) and are forecasting £40.9m of full year benefits
against a plan of £40.2m.
The total change spend in Q1 was £22m less than forecast with broadly two components.
e¢ We spent £27m rather than the £35m requested from UKGI because
o Project Everest (Cloud enablement) and ATOS negotiations have taken longer than
expected.
o Data (Project Arrow) has been paused for a review of the future of the Credence
software.
o Branch kit (EUC) rollout is on track but settlement with the key supplier has been
delayed.
o Identity and Insurance projects were forecasted too optimistically given the need for
strategic review and detailed requirements gathering respectively.
e We had carried forward some high level estimates, funded by ourselves, from last year which
were not realistically timed. This will not recur.
Project prioritisation and certainty is being assessed over August by Finance and the Strategic
Portfolio Office. We will then formally re-plan the annual spend at the end of Q2. However, it
seems likely that the total spend in year may be less than £255m. The re-plan will also include a
reassessment of future benefits delivery.
We do however expect to spend the £168m Government funding in year, £50m is requested for Q2
to deliver 10 DMB closures, 67 new branch openings, the final rollout of branch kit, the last phase
of back office transformation and Insurance system changes. This is net of £8m carried forward
from Q1.
Network numbers and SGEI delivery are not yet available for Q1 and will be reported separately.
Input Sought
The Board is asked to note the progress made and approve a request for £50m of Q2 funding from
UKGI.
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BOARD DECISION PAPER
The Report
What was Q1 change portfolio spend and how is that different from the
plan?
1. In Q1, £43m was spent as change against a £65m budget. However only £8m of this underspend
was from UKGI funding. Half of the Q1 underspend is within IT and this was mainly due to delays
in contract negotiations and the need to focus on project delivery. Appendix 1 lists the projects in
full with commentary in Appendix 2.
£’m Q1 Plan I Q1 Actual I Variance
Simplify the retailer proposition
Build innovative, flexible and secure IT
Modernise our products and services l RRE L EVAN T
Digitise and optimise the business
Modernise our skills, culture, HR policies ANd ProCceSS@S fa one snsnyevnsnnsnensneensntnseengentntnnnrntnnevnsnnr
Regulatory & Group Litigation £ 1.0 I £18 I (0.8)
oe aioe Sd IRRELEVANT
2. Weare constantly re-forecasting our full year outrun. In year benefit-delivering projects are
expected to cost £15m more than the budget of 159m.
e Further franchising DMBs: We are announcing more ambitious plans in July creating an
additional need for onerous contract provision costs
¢ Back Office Transformation: As discussed at the board, the project is expected to overrun
by £4.3m with the delay and October go-live.
3. At the same time, we are likely to spend less in year on future-benefit delivering projects. Costs
are now expected to decrease to £61m from £76m, mainly driven by:
e Mails: We are not at a point in the RMG relationship where spent can be triggered.
e Banking Framework — Future of Cash: More of this spend is likely to be BAU opex, not
change.
Overall, we may conclude at end Q2 that we will not spend the whole £255m budget in 2018-19.
However, we do expect to spend the investment funding of £168m. We will revert in October with a
re-assessment including benefit implication.
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BOARD DECISION PAPER
What benefits have been delivered in Q1 and what’s the current full year
benefits expectation?
4. Q1 projects delivered benefit of £7.9m in line with the plan of £8.2m. In year benefits are
expected to be delivered broadly in line with the plan.
5 Q1 Benefit I Qi Benefit 2018-19 I 2018-19
em Actual Plan Plan I Reforecast I I 92 Benefit
Simplify the retailer proposition £32 I £32 I £11.8 £ 13.0 i
- Further franchising DMBs f
- Network Expansion
- Multi-year Crown Projects
I-_Self Service Kiosk Rollout
Build innovative, flexible and secure IT}
- Branch Printer Replacement
CDP re-procurement
I EUC Branch Deployment
-_HNGT Lite
= PCiPayments Hub
Project Everest — Cloud enablement
-_ Project Nelson -Atos Negotiations
- Software Asset Management
Modernise our products and services
- PO Insurance
- Project Galaxy
I- Falcon — Travel Hub
Digitise and optimise the business
= Success Factors Ph1 Completion
Modernise our skills, culture, HR
policies and processes
I- Back Office Transformation
Total Trading profit impact Hl
IRRELEVANT I
! IRRELEVANT I
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BOARD DECISION PAPER
What is the change plan for Q2?
5. We expect to spend! in Q2, excluding any spend on Payzone which is not funded by
Government. Net ot carried forward, we are requesting I rreevrifawdown.
lem Approval Strategic
Status Stage
I- Further Franchising DMBs Vv Execute
- Network Expansion Vv Execute
- Agents / Postmasters Portal V Execute
I- Other smaller projects Vv Execute
I- Branch Printer Replacement v Execute
- CDP re-procurement v Execute
I EUC Branch Deployment Vv Execute
I- Project Everest — Cloud enablement Vv Design
- Project Nelson -Atos Negotiations V Execute
- Risk and Resilience v
- Full Think Client Deployment (Solar Full) Vv Execute
I- Other End-of-life replacements Vv Execute
= Other Smaller Projects
I- PO Insurance Vv Design
- Identity Projects v Execute
IRRELEVANT
I- Property Vv
I- Falcon ~ Travel Hub v Execute
- Other smaller projects V Execute
- Project Arrow v Design
I- Success Factors Vv Execute
I- Other smaller projects Vv Execute
I- Back office Transformation v Execute
- GDPR Vv Execute
- Group Litigation V Execute
stimated to be delivered in Q3
\ Approval at Gate 2 or beyond, development in progress
\ Approval at Gate 1, designing the project
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BOARD
APPENDIX I — Project level spend analysis
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APPENDICES
2m
‘Simplify the retailer proposition ;
Further Franchising DMBs i
Network Expansion
Agents / Postmasters Portal
Automation
Other Smaller Projects
Build innovative, flexible and secure IT i
Branch Printer Replacement
CDP re-procurement
EUC Branch Deployment
Project Everest — Cloud enablement
Project Nelson -Atos Negotiations
Risk and Resilience
Full Thin Client Deployment (Solar Full)
Other End-of-life replacements
Project Trafalgar.
Other Smaller Projects
Modernise our products and services
PO Insurance
Banking Framework — Future of Cash incl. Vehicles !
Project Galaxy '
Mails Projects
Digital Check & Send
Property
Falcon — Travel Hub
Identity Projects
Other Smaller Projects
[Digitise and optimise the business
Project Arrow
Success Factors
- Cash Management
Other Smaller Projects
Modernise our skills, culture, HR policies and
processes
Back office Transformation i
Regulatory & Group Litigation
GDPR
Q1 Plan I Q1 Actual
IRRELEVANT
Variance
- _Group Litigation
£0.0 I £05 I (0.5)
TOTAL
Of which UKGI funded
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BOARD APPENDICES
APPENDIX II - How major projects have performed in Q1?
Simplify the Retailer Proposition
Network Programmes
Overall, we plan to franchise 28 DMBs this year and open 338 new branches at a cost of £82m,
including onerous contract provision. At the end of the Q1, we have franchised 7 DMBs and opened
83 branches and spend £9m.
Agents/Postmasters Portal
The project has been approved by the Investment Committee and shows no actual spend within Q1,
a variance of £0.6m vs budget as the focus was on preparation.
Build Innovative, flexible and secure IT
CDP re-procurement
The plan to start deploying new common digital platform (CDP) was expected to be completed in Q2.
However agreement on the transition to Amazon Web Services (AWS) caused a delay and is now
expected to be completed early Q3.
EUC Branch Deployment
Continued delivery of Branch Technology refresh, with new kit in 15,000 counters out of 27,000 at
end of Q1. Lower spend wa due to final settlement agreement for completion of HNGA rollout which
was assumed to be in Q1. (ca. £2m) Remaining delivery forecast is in line with the original plan.
Project Everest - Cloud Enablement
Development work on Phase 2 (of 9) on transition to cloud. Delay is due to finalisation of cloud
enablement business case moving from Q1 to Q2. Spend has been therefore postponed.
Project Nelson
Payments have been negotiated to be milestone driven which delayed the spending. The first
milestone is expected to be reached in Q2 and ramp up in spend is expected ahead of September
delivery of new support model.
Risk and Resilience
Various projects maintaining service levels within IT. Evenly phased budget due to nature of works,
with lower spend than expected seen in Q1 since the focus was given to key benefit delivering
projects.
Modernise our Products and Services
Post Office Insurance
Post office insurance projects present an overall underspend of £2.1m mainly attributable to delays in
various projects:
« CVM (Building cross sell and upsell functionality) and Pricing tool (Travel Ins and General Ins
Pricing Optimisation) projects due to a deep dive review of the opportunity outcome and a
reissue of the RFP to vendors with the objective of increasing the effectiveness of the solution.
The end timeline has not changed, expected spend will still occur within a condensed time line.
e Cronus (Duck Creek system changes) delay in commercial negotiations with the
implementation partner, Accenture. Run rate in future months expected to be ahead of original
plan to catch up the delays incurred.
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BOARD APPENDICES
e Nemesis (Migration of Home insurance to Duck Creek system) due to increased focus on
detailed design which has moved the spend phasing back.
Banking Framework — Future of cash
Future of Cash project shows no actual spend within Q1 with a variance of £0.6m against budget.
This is due to type of spend classification as in the initial budget the spend was assumed to be
capitalisable however YTD all incurred cost has been opex. This change has been reflected in the
forecast and corrected for the rest of the year.
Mails Projects
Budget spend will largely be triggered by the outcome of conversations with RMG, creating
opportunities or a need for defence spend.
Digital Check & Send
The HMPO Digital Check and Send project was scheduled for Q1 delivery. The project has delivered
the design and build of the middleware, the connection between the middleware to HMPO and the
connection between middleware and front end. Delivery of the project itself has been pushed back to
Q3. Scope changes from Home Office has led to a delay. The impact of the delay has been an
increase cost to the project of £0.4m
Property
Property capex projects are generally BAU in nature and are devolved in the background as they
consist of small several small projects. The overall impact of these small projects is being quantified
and a more accurate spend profile has been reflected in Q2.
Falcon Travel Hub
The Post Office Travel App has been delayed by 6 weeks and launched in June 2018 which has.
resulted in £0.9m cost increase and £0.2m benefit reduction. Expected revenue is currently tracking
behind due to market conditions and less Travel Money Card sales than expected. However to date
we have seen 2.5k top-ups via the app with an ATV of £254; and 130 Travel Insurance policies sold
through the App. There was a serious technology outage on FRES'’s side for 3 days in June which
prevented any Travel Money Card top-ups. We are also investigating why the ratio of App downloads
between the Travel App and FRES App has swayed towards FRES in recent days.
Identity Projects
Identity Projects were postposed to enable a broader approval of the business case which is in
progress and therefore resulted in underspending by £1.9m in Q1.
Digitise and optimise the business
Data (Project Arrow)
The Data project, covering strategy, governance and delivery, has been passed pending the IT team
agreeing the future of Credence.
Modernise our skills, culture, HR policies and processes
Back Office Systems Transformation
Continued progress on replacement of POLSAP. The budget plan was June completion however due
delays in the project, the current plan is to be completed towards Q3 which resulted to a £4.3m
increased costs and reduction of in year benefit by £0.2m.
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BOARD PERFORMANCE UPDATE
Retail CE’s Report - July 2018
Author: Cathy Mayor Sponsor: Debbie Smith Meeting date: July 2018
Executive Summary
Context
The Period 3 Retail Commercial Performance Report for the Board.
Questions this paper addresses
1. How are our sales and revenues performing against our targets and prior year?
2. What are the implications for our outlook and plans?
3. Competitor Information.
Conclusion
1. Retail has started the y
under Income budget ¢
budget is anticipated.
Il, restricting year on y
and ahead on profit by
ome decline to -2%, just
', Further upside to profit
2. Network customer sessions have been stable throughout the quarter at 10.2m
sessions per week.
3. Customer service levels have continued to improve through the quarter across the
network driven by the focus on customer drivers. Year on year P3 Effort improved
+4% to 84.9% and the new Customer Driver score average is 88.6%.
4. In Mails, underlying trends continue with strong volume growth in Home Shopping
Returns and premium services (Special Delivery) offsetting systemic decline in
stamps.
5. In Banking, volume growth trends continue with withdrawals +6% and deposits
+43%.
6. Work on Retail strategy is now switching to planning following the Board’s
endorsement of approach at the June away day.
Input Sought
For the Board to review and note.
Strictly Confidential Debbie Smith, 23 July 2018
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The report
Overview of Financial performance
Period 3 yD
Gross Income (£m)
Mails Annual Fee
Mails Variable
Banking Services
ATMs
POCA
Payment Services
Retail & Lottery
Retail Total
Retail Profit (£m)
Mails
Banking Services
ATMs
POCA
Payment Services
Retail & Lottery
Retail Total DPC
Fixed Agents Pay
Network & Sales
Retail Programme Costs
Retail Central Costs
Retail Profit
1. Retail has started the year well, restricting year on year income decline to -2%, just
under Income budget (-£0.7m) and ahead on profit b’ I RELEVANT! At this stage the profit
upside is predominantly driven by product mix impact on agents pay within mails
(lower volumes labels and Sig
generating +£0.4m YTD, witl !
& Banking services trading.
2. POca is adverse to budget in Qi due to stronger than anticipated active account
volumes impacting the timing of tiered pricing assumptions. Currently close to
volume tier threshold below which The Adverse impact
in Q1 is expected to be offset in the remainder of the year assuming the current
trajectory of volume decline continues.
3. Looking ahead, our view of opportunities outweighs risks with income upside o' :
and profit upside o rl anticipated. The main upsides are from mails, where the
around stamps billing process have concluded.
Strictly Confidential Debbie Smith, 23 July 2018
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Market Update
4. The key trends of disruption and consolidation in the Retail sector continued apace
this quarter. ‘Bricks and mortar’ non-food retailing saw a 4.1% sales decline in the
quarter to end May 2018 on a like for like basis (Source: BRC/KPMG Sales Monitor),
coinciding with a series of major store closure programmes and profit warnings from
a host of household brands including M&S and House of Fraser. The convenience
sector has continued to see sales growth of 2.7% (Source: IGD Convenience sector
review June 18) in the first half of the year but for the first time in 5 years store
numbers are flat year on year.
5. Sainsbury and Asda announced their intention to merge and Motor Fuels Group (the
largest forecourt retailer in the UK) announced they plan to buy MRH (the second
largest). Last month also saw Morrisons re-launch the Safeway brand to strengthen
McColls own label range and both Tesco and Co-Op have indicated they will use their
own brand to strengthen ranges in the symbol groups they have recently acquired
(Booker and Nisa).
6. Hermes lost their case that couriers were independent contractors rather than
employees. While significant for all operators with similar employment models, it is
particularly material for Hermes, who are expected to appeal. The cost impact of
treating all couriers as employees could negate Hermes current profitability (£35m)
and/or require a price increase of up to 15p-20p an item. Such an increase would
reduce their competitiveness but help raise UK parcel market rates.
7. DP DHL subsidiary UK Mail are expected to take over the Pass my Parcel operation
whose closure was announced in June. Full details are not yet known but such a move
would strengthen UK Mail’s B2C proposition and relationship with Amazon, a major
Pass my Parcel client.
8. Collect+ reported a +2% increase in volumes over the last 12 months and continue
their aspiration of becoming multi-carrier, although no partnerships have been
announced since the launch of this strategy over 18 months ago.
9. DPD have added a parcel send function to their customer app in a bid to attract higher
margin consumer and marketplace volume. This is not expected to have a material
impact on Post Office volumes but signals the intent and ease with which alternative
offers can reach consumers. Other operators are expected to follow.
10. LINK have announced a trial with PayPoint to enable cash withdrawals and deposits
over any PP counter. Whilst unlikely to be a robust challenge to our proposition, we
are monitoring closely.
11. Bank closures continue apace with c.800 still to close in 2018, and expected new
announcements likely to be made in the coming months.
Customers
12. Network customer sessions have been stable throughout the year at 10.2m sessions
per week.
Strictly Confidential Debbie Smith, 23 July 2018
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Current A ‘ Year
Period patie ara on ytp I Target
i) : Year
Effoge (s caving host Otticell voc 84.9% 84.6% 40.3% 80.9% +4.0% 84.6% 82%
is Easy to do business with)
Wait time Acceptability voc 96.3% 96.3% 0.0% 94.4% 41.9% 96.2% N/A
13. Network Effort has seen continued strong performance. With branches focusing on
Drivers we can see the benefit feeding through to the Effort score, +2.6% ahead of
target. Wait time acceptability continues its strong performance at 96.2% YTD.
Customer Drivers (CDS) (Measured for the first time this year)
Current Prior a
Source Period Period I Cy YTD
(P3) 7) aed
eral custome Die voc 88.6% 88.4% 40.2% 88.6%
Score
Friendly voc 88.4% 87.9% 40.5% 88.3%
Professional voc 89.0% 88.5% +0.05 88.9%
Knowledge voc 89.7% 89.7% - 89.8%
Understanding voc 90.0% 89.6% 40.04% 89.9%
Expectations voc 88.0% 87.7% +0.3% 87.9%
Efficiency voc 86.7% 86.8% 0.01% 86.8%
14. Travel workshops, focused on Driver behaviours throughout our travel suite has seen
travel CDS grow 5.4% against Network CDS. We are adopting the same approach
with mails workshops and adapting all other network training to gain the benefits of
continuity which is seeing customer driver focus quickly becoming BAU.
Mails performance
15. Trading income is up +4% vs PY with Home Shopping Returns continuing to perform
well, +31% year on year (£5m YTD, +£0.2m vs budget) with IMRG reporti online
market growth of +16.9% YTD, whilst Labels continues to grow +3% {r YTD, -
£0.2m vs budget). Stamps continue to decline -9%, although some improvement has
been seen in P2 & P3, which is expected to bring it more in line with last year’s -6%
trend. Local Collect, whilst small (=! YTD) is seeing good growth (+27%) which
is expected to accelerate as new clients come online, notably ASOS and SDG.
16. Conversion of all branches to the new retail product proposition with WH Smith has
been completed. Focus is now on optimising in store product mix to maximise sales.
Cash & Banking performance
17. Overall cash withdrawals across the market (ATM and counter) are reducing at c.5%
p.a, with an expected impact on our ATM volumes in line with budget expectations.
However counter volumes are holding well above budget so overall banking services
are up +14% YTD tO RELEVANT! +£0.2m vs budget.
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18. The UKF/EST 5-point marketing plan is developing well. New collateral is with the
banks for inclusion into theirs.
19. After May Board, Future of Cash pricing is now being developed in time for Banking
Framework2 discussions prior to end of Q3.
20. In POca, DWP pressure on customers to migrate from POca accounts is having a
reducing effect, and DWP have confirmed they will cease to press for migration after
November. New products and services are being proposed to DWP to assist in
eventual POca replacement.
21. ATM transactions have been slow through Q1, mirroring the general reduction in cash
withdrawals across other ATM networks (LINK volumes -4% YoY). Availability issues
(94% vs target of 96%) continue to impact volumes and profitability. With c2,100 of
the 2,350 network consistently achieving 97% availability, actions are being targeted
at the c250 persistent offenders who are consistently cashing out driving the average
down.
Payment Services performance
22. Contracts have been exchanged on Project Panther and public announcement
commenced on 27th June, with positive responses from key external stakeholders and
PayZone staff. The initial disclosure notice has been submitted to the CMA and
dialogue commenced with the case team. Intelligence from PayPoint indicates they
will push the state aid argument but our competition counsel remain confident in our
position.
23. Client response has been very positive with Npower (‘r Paypoint Txns p.a.) and
Yorkshire Water (ins iPaypoint Txns p.a.) requesting an overview of the potential
coverage of the combined network and a commercial offer for exclusivity at the earliest
opportunity. Senior level engagements are also planned with British Gas
Paypoint Txns p.a.), EDF jiRRELevaN I Paypoint Txns p.a.) and E.on
over the next two weeks. oO
24. Commercials and launch plans are being finalised for a Q3 launch with Epay for new
mobile and digital content such as Amazon, Paysafecash, Netflix and Uber topups.
Pre-award contractual discussions continue with Scottish Power for their Prepaid
Energy Smart Meter business and we are preparing our Best & Final Offer following up
the Power NI RFP. The contract renewal discussions with BT have progressed with a
mutual commitment to sign a new deal by the end of the month.
Retail Strategy
25. Having secured the Board’s endorsement of our proposed approach, we are now
focusing on developing plans.
e New, segmented formats: the HNGT business case, a critical enabler to our new
formats, has been completed and will be approved this month. Joint work continues
between Retail and FS&T to review FS&T products and decide how, and in which
formats, they will be sold in the future. An agile working group is also exploring how
we can develop and trial new self-service (kiosk) formats as soon as possible.
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e Strong franchise relationships: we are starting a comprehensive review of agent
remuneration and will report back to the Board in November. A review of our field
team with the aim of improving how we support and engage with agents is underway.
Network Transformation Programme
26. The NT programme continues to perform strongly in its final year, having delivered
7,638 openings and 7,738 contracts to date. With 49 branches already converted and
a further 40 planned in, we are likely to over-achieve our 2018/19 target of 100.
Directly Managed Branches (DMB) Programme
27. The DMB Programme is on track to conclude the Network Shape business case in
2018/2019, with a further 28 DMB exits an of benefits to be delivered. We
have exited 7 to date this year, with 11 more at various stages of the franchising
process and a healthy pipeline in place to ensure delivery of the remaining 10.
28. Work continues in preparation for implementing the DMB business case approved by
the Board in January. We will advertise in late July across c475 Post Code districts
across the UK (190 of which contain a DMB), a necessary step to allow us to recruit
new operators in these areas. We have an agreed Communications plan which
includes briefing all DMB colleagues in the 190 branches on 31* July and also engaging
with our unions and the NFSP. We will also be advertising for temporary operators
across our network to allow us to exit DMBs at pace where there is no permanent
solution available.
29. We have also concluded work, supported by BNP Paribas, to create standard leases so
that we can sublet some of our DMB properties to temporary operators without
landlords’ permission. This activity is crucial to enabling delivery of 56 DMB exits in
Q4 2018/2019 and} of benefit.
Network Development Programme
30. We have opened 82 new Local branches so far this year. Our full year target is 338
and we are slightly behind schedule but aim to be back on track by the end of Q2.
Our pipeline of new operators continues to be relatively strong with a total of 252
potential new branches in the recruitment process. As noted in the Retail Strategy,
securing enough good quality operators remains a challenge and we are focusing on
improving our recruitment and on-boarding process to reduce the drop-out rate.
Strictly Confidential Debbie Smith, 23 July 2018
POST OF
FICE
Appendix 1 — Retail Scorecard
3 2018
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AREA
MEASURE
Prier
Month
7etwat
Bova,
Taraet
Month
Pr
Month
Fatwa
vm,
PERFORMANCE
NETWORK
pro
(Gess Income
Traéng Profit Em
alls - Proty Volume m
Miia ~ Tol Labels Volume m
Mais - ick Galect Volume m
Banking Al Transactions Value
Payments Volume mm
i. of custome: Sessons
No. of Reta Transactions per session
‘Branch Nabors (mth in anears)
ree outs
Franch standards - Lance Mentfed ic
‘Chum -resgnasons
‘wvenity ie Waren (Leve! 48 above)
Trust our people (Line Manager dex
engagement a5 at 1 survey
ut
WA duc to Codence data ames
Po targee <3% for level 34 & above
Appendix 2 — Retail Income by Product
Gross Income
£m
Parcelforce
Special Delivery
Intemational Prio
Stamps (1st & 2nd)
Labels (1st & 2nd Class)
RM Signed For
Home Shopping Retums
Other Trading
Total Mails Trading
Annual Fee
Mailwork & Mails non trading
Total Mails Non-Trading
Retail (Inc Gft cards & Other)
Lottery
Retail and Lottery
Payment Services
Payment Services
Banking Services
Card Account
ATMs
Cash & Banking Services
Tot
Gross Income
rity & Standard
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P3 yD Full Year
var Var %Var Var PY Var Var Var
Bud YA py py I At) BUd gag act py Pym «=P PY py
IRRELEVANT
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BOARD DISCUSSION PAPER
Future of Cash - Banking Framework
Author: Martin Kearsley Sponsor: Debbie Smith Meeting date: July 2018
Executive Summary
Context
1. The Post Office is becoming the major cash utility for the UK, as cash usage continues
to decline. This presents a short to medium term opportunity, and a fu
from nless notice is received by us
4. The Banking Framework has seen significant growth since launch with withdrawals
currently ¢ growing at +7% pa, and receiving{" rI growing at +18% pa. It
is set to expand again with the accelerating rate of branch closures likely to carry on
until 2021 (but not all banks).
5. The Future of Cash project, linked to our North Star ambitions, identified capex (vans,
equipment and branch upgrades) and opex (Agent remuneration, extra supply chain
shifts) required to fund relevant expansion of PO to cope with increased cash handling
from this expansion.
Input Sought
6. For the Board to review and discuss.
Strategic Opportunity
7. Branch closures are accelerating, particularly amongst the top 3 banks, generating
significant savings for the Banks. This brings increased transactions and footfall to the
PO but is putting significant pressure on PO operations and costs.
8. We are approaching the first Banking Framework 3 year review point in
9. There is an opportunity to develop a more strategic relationship with the major banks,
to build longer term partnerships to improve our shared customers’ experience, for
example through simplification and automation, digital/customer experience
integration, broader access and services.
How does Banking Framework work?
10.The BF is ~~ IRRE
nevevent! DOIN, tl
° Effective
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i . With growth comes excess cash and challenges to moving it, storing
it, and other costs of handling it such as increasing security considerations (as more
icant_cash holdings
_ IRRELEVANT
18.Review of operations and efficiency.
working would reduce PO complexity.
19.A partnership approach to drive the future strategic opportunities such as automation
and simplification, identity verification, ongoing in-branch and digital customer service
as cash usage declines, including investment funding by the banks. There is an
opportunity to transform how we handle cash in the network which requires significant
investment and from which the banks would benefit from future reduced rates and
speed of processing.
lore consistency across the banks ways of
How do we size the opportunity?
20.There are 3-4 banks with significant branch closure plans.
21.However, not all banks are closing branches. Some are expanding, eg Metro Bank,
and so wouldn't accept a generic increase.
22.In conversations with our CFO,/ Ihave indicated they will save approx.
from branch closures.
23.We have recently recruited a banking consultant, who has worked at both
are working with KPMG to size the opportunity.
24.We need to improve our understanding of the big banks pressure points and
digital/efficiency opportunities.
25.It is also important we broaden our thinking beyond the immediate. Whilst the short
term landscape is significant volume increase, the longer term will see volumes drop
off from the peak.
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What alternatives do the banks have?
26. Although competition is currently low, Paypoint have recently launched a cash product.
ieved that IRRELEV. ;
IRRELEVANT
High level Approach
“I IRRELEVANT
30. We will engage ‘with the top 5 banks to ensure @ alignment with ¢ our ehinking.
31.The biggest opportunity for all rh
with them.
‘Spportunity.
33.Construct a deal for everyone.
34.We will leverage support from UKF and the Government in our discussions with the
banks.
What capability do we need?
35.We need to build the teams negotiating capability through external recruitment of a
Lead Negotiator.
36.We need to engage at GE level with the key banks, to put senior stakeholder
relationships in place before negotiations start in earnest.
37.Set up a governance group that meets as required, chaired by the CFO.
Next steps
38.Agree direction and bring back to the September board a detailed step by step plan,
including red lines and negotiating mandate agreed by the Steering Group.
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BOARD CORPORATE STRUCTURE - POSITIONING PAPER
Alternative Corporate Structures
Author: Jane MacLeod Sponsor: Jane MacLeod Meeting date: 30 July 2018
Context
During the last year, the Board received papers relating to several emerging business
initiatives which support our evolving strategy and which are likely to also necessitate
the establishment of new corporate entities, e.g. Panther, potential acquisition by Post
Office Insurance (“POI”), development of further Financial Services propositions arising
out of Peregrine and planned expansion into regulated services through the Customer
Hub. Realisation of these initiatives is now imminent, over the coming 6-9 months.
We believe our current group structure is sub-optimal to support effectively our
medium-long term strategy, and following initial assessment, consider this would be
better served by establishing a Holding Company (“HoldCo”) over Post Office Limited
(“POL”).
This paper sets out the rationale for establishing a HoldCo, and seeks approval to
proceed with detailed assessment of the resulting future corporate structure, for Board
approval in September / October.
Questions this paper addresses
1. Why is the current structure suboptimal to support delivery of our strategy?
2. What are the benefits of using a HoldCo structure?
3. What are the costs of establishing a HoldCo?
4
. What principles and criteria will be used to perform detailed assessment of our
corporate structure options, and how would we progress this analysis?
5. How would we progress this analysis and develop the case for change, business
case, and options / choices for implementation (e.g. big bang vs. incremental)?
Conclusions
1. Our initial assessment shows a HoldCo would better enable Post Office to deliver its
strategy and manage the additional operational, regulatory and governance
requirements which are created by that strategy, therefore we recommend
proceeding directly to establish a HoldCo subject to the necessary Shareholder and
regulatory approvals and corporate filings.
2. Further assessment is required to develop the group structure proposition as well as
implementation options and choices, and business case for restructuring. The most
optimal structure would allow, amongst other things, each part of the business to
operate within their regulatory environment without adding additional obligations
imposed by other parts of the business who are subject to heighten regulatory
obligations.
3. External advisors will be required to support delivery of the analysis above.
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4. Ahigh level summary of the design principles and criteria, which include Post Office’s
North Star, Strategic Imperatives together with legal and financial (including
taxation) is set out in Appendix 1 and 2.
5. A project will be established sponsored by Jane MacLeod, General Counsel, and lead
by Ben Foat, Legal Director and Jonathan Hill, Compliance Director to provide a
holistic assessment of the optimal group structure having regard to the design
principles and criteria which will support the setting up of the various subsidiaries
over the next financial year (rather than doing so in isolation without regard to the
broader implications across the organisation).
Input sought
6. The Board is asked to approve, in principle:
i. The creation, of the HoldCo above POL, noting that further approval would be
sought before operationalising the new structure, e.g. transferring /
restructuring employees, assets, governance, subsidiaries etc.
ii. The proposed approach and indicative budget required to establish the
HoldCo, and refine and perform detailed assessment of the future corporate
structure.
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The Proposal
HoldCo mitigates the risk of unnecessary regulatory oversight
ve HoldCo would be an enabler to help Post Office more effectively deliver its growth
strategy by helping the company segregate its regulated businesses from its non-
regulated businesses. Moreover, HoldCo could still own the POL brand, values
and overall strategy over its businesses within a group structure.
8. The current corporate structure poses a significant risk that POL would need to
become directly regulated by a number of authorities, particularly the FCA, if it
is to progress the agreed strategy of increasing its share of its business value
chains.
9. It is unlikely that POL would be able to achieve the required regulatory standards
without substantial investment, restructuring, reporting, people change and
training in the short to medium term, and this would therefore materially affect
the Group’s ability to deliver its strategic objectives.
10. Alternatively, if POL was to become directly regulated, it would subject its non-
regulated businesses to a regulatory burden and cost that is disproportionate to
the risks and placing them at a significant risk of becoming uncompetitive.
11. By setting up a group structure with a HoldCo, Post Office would, to a very large
extent, remove these obstacles whilst enabling it to maintain control of its future.
Current corporate structure
12. Until June 2017, shares in POL were held by Postal Services Holding Company
Limited (“POSH”) which historically was also the holding company of Royal Mail
Group plc. Following the disposal of all shares in Royal Mail, the government, as
shareholder, concluded POSH was no longer needed. POSH was then liquidated
and its shares in POL were transferred to the Secretary of State (“SoS”) for
Business, Energy and Industrial Strategy.
13. The resulting current corporate structure is outlined in Appendix 3.
14. There are currently several initiatives being implemented and considered which
support delivery of our strategy and which are likely to necessitate the creation
of new corporate entities in the near-term or involve the acquisition of existing
corporate entities:
i. Panther (contracts for the acquisition have now been exchanged)
ii. Post Office Insurance (considering IRRELEVANT. ——™”
iii. Expansion of the Customer Hub (planned to require a regulated entity to the
extent this involves certain regulated services)
iv. New Identity proposition (significant impacted by procurement, speed to
market and liabilities; anticipated will require a subsidiary or commercial Joint
Venture)
v. FRES?
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Disadvantages of the current structure
15. Our current corporate structure results in various operational and strategic
constraints, as outlined below.
16. Direct Regulation - The ability to engage with other non-Bol partners in FS, as
a result of Peregrine, (e.g., for credit cards and investments) would effectively
require Post Office to become regulated or would require the FS business to set up
a separate regulated entity in its own right. Further, as the Customer Hub
expands, as planned, into providing regulated services (i.e., Account Information
Service Provider and Payment Initiation Service Provider services through PSD2)
it is expected to need to be directly regulated. In each case it is likely that it would
be both impractical and possibly not permitted for Post Office to become the
regulated firm. Moreover, if it were to, this would subject its non-FS businesses
to regulatory scrutiny from and compliance with the FCA and potentially additional
regulatory obligations such as the Senior Managers & Certification Regime
(“SMCR”) which would not presently directly apply to Post Office.
17. Other disadvantages of the current structure are outlined below:
i. Regulatory compliance - Contagion of regulatory compliance requirements,
e.g. arising from the Financial Services activities;
ii. Procurement constraints - Contagion of constraints in procurement
processes which arise from the Public Contracts Regulations (PCR).
iii. Limited access to capital - Our access to third party funding is limited by
having the SoS as shareholder, and being subject to the Postal Services Act:
a) Equity - the Postal Services Act prevents the disposal of the Crown's
interest in POL, or issuing of shares to a third party to raise capital.
b) Debt - the HM Treasury convention is that public sector entities (i.e.
POL or a majority-owned subsidiary) are only financed via the
Exchequer, rather than debt issued by a third party.
iv. Attractiveness to potential partners - The consequences of our current
structure limit our ability to attract potential partners to provide capability and
funding to the Post Office, e.g. funding constraints, and SoS shareholding /
role in decision-making.
v. Liabilities - As one legal entity, liabilities cannot be confined to the Business
Unit where they are incurred and can be attributed to the wider business.
Future corporate structure
18. Based on the above assessment, we recommend establishing a new HoldCo over
POL, to enable the delivery of our group strategy. An indicative future structure
is set out in Appendix 4.
19. The creation of Holdco would be realised by SoS transferring to Holdco all the
issued capital in POL, in consideration for the issue of shares by Holdco to SoS.
Initially POI would remain a subsidiary of POL, however as part of the wider work
on the optimum group structure, consideration will be given as to whether there
are benefits to it becoming a direct subsidiary of HoldCo - particularly in light of
any further acquisitions by POI.
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Anticipated benefits of creating a new Holdco
20. There are various ways that additional entities (subsidiaries, sister companies and
JVs) could be created under the Holdco to address some of the constraints
mentioned above, help accelerate the execution of our strategy and deliver several
potential benefits:
i. Direct regulation - Importantly, the creation of a Holdco would obviate the
need for POL to become directly regulated as a result of expansion into new
financial services lines through Customer Hub or following Peregrine.
ii, Regulatory insulation - Both POI and the proposed PO Money ‘NewCo’ are
designed to enable us to take greater control of the value chain in financial
services without subjecting POL to the associated regulatory requirements.
iii. Exemption from PCR - It is possible for a subsidiary (e.g. POI) to fall outside
the scope of PCR provided it has a commercial character (i.e. managed
commercially to generate profit and is subject to normal market conditions).
iv. Access to external capital - Creation of subsidiaries under HoldCo could
improve our ability to access external capital:
i. Equity - the restrictions mentioned regarding disposal / issuing of
shares in POL do not apply to subsidiaries of POL which are not engaged
in the provision of post offices. Therefore, subject to POL’s articles, POI
or other similar subsidiaries would have the potential to raise equity;
ii. Debt - the convention for public sector entities to be financed only via
the Exchequer also applies to wholly / majority owned subsidiaries, but
not to JVs (e.g. FRES, which is not directly controlled by POL).
v. Limited liabilities - Parent companies often form subsidiaries to limit their
potential for losses e.g. from higher-risk business ventures and this will be a
consideration for the proposed identity business. However, from a
reputational perspective, the value of such a liability shield may be limited for
the Post Office. It should also be noted that PCR exemption for commercial
subsidiaries assumes that POL would not intervene to prevent insolvency.
vi. I Tax advantages - Companies working across multiple jurisdictions, often use
subsidiaries for tax arbitrage, although this is not currently applicable to Post
Office. However, a tax advantage could potentially be created in other ways,
e.g. putting our non-commercial network into a subsidiary with charity status.
vii. Conflicts of interest - A HoldCo structure should also remove the current
and likely conflicts of interest (and inversion of standard practice) that
currently arises from POI (an FCA regulated Principal) reporting into its parent
(an Appointed Representative of POI). Instead POL, POI and the FS NewCo
would become sister companies under Holdco;
viii. I Dividends - Currently, the accumulated losses of POL effectively prevent the
Group from paying dividends. It may be attractive to BEIS if it enables certain
subsidiaries (e.g. FS, POI) to pay dividends into the HoldCo which could then
either be paid to SoS, thus helping to create a more commercial relationship
with SoS by providing a mechanism to return any ‘surplus’ funding if business
performance allows; or conversely, dividend received by HoldCo could be re-
invested into the relevant group entities and in doing so provide greater
transparency of costs of that business. Any future profits could remain within
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the group structure to support the ambition of being commercially sustainable
and without the need for government funding in the future.
ix. Clearer commercial and customer focus - Subsidiaries can help create a
clearer sense of purpose, with greater autonomy, agility and specialism, such
as is reflected in anecdotal feedback from POI.
21. The considerations above have been used to inform the detailed criteria we
propose to use in the detailed assessment of the future corporate structure, which
are presented in Appendix 2.
Proposed next steps
22. In parallel with the detailed assessment below, given the need for, and lead time
involved in establishing a HoldCo, we propose to set up this entity this without
delay, noting that further Board approval will be sought before operationalising
the HoldCo.
23. We recommend refining and performing detailed assessment of the resulting
corporate structure so the case for change, business case, implementation options
and costings can be developed for Board approval.
24. The detailed assessment of the future corporate structure will be focus on:
i. Four key design principles presented in Appendix 1
ii. 11 assessment criteria presented in Appendix 2
25. Before establishing the HoldCo it will be necessary to:
i. obtain Shareholder approval;
ii. receive FCA approval for the change in control of Pol, as FSMA requires FCA
approval for transactions involving the insertion of a new HoldCo even where
there is no change in ultimate beneficial ownership. This would typically take
up to 60 days.
iii. Decide the interim directors of the HoldCo for the purposes of registration and
ancillary matters
iv. Obtain Board approval (in September / October) to approve the Share
Transfer Deed (subject to FCA approval), transfer of the Shareholder’s shares
to HoldCo and the consequential updates to the register of members
Approvals sought
26. Board approval is sought in principal for the following steps. Financial approvals
will be sought through the change funding processes.
i. Establishing the HoldCo as described above.
ii. Proceeding with detailed analysis of the future corporate structure.
iii. Proposal to seek further Board approval in September / October for
approval of the target Corporate Structure.
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Appendix 1 - Design principles
le Proof points
e The subsidiary structure should be invisible to customers - for
1) Better IO them it’s just the Post Office.
¢ Our ability to offer joined-up customer propositions across a
number of product categories should be strengthen not
diminished.
¢ Clients and postmasters should also benefit from joined-up
account management - they don’t want to be dealing with
each subsidiary separately.
2) Simpler to . Decision making should be accelerated not slowed
fun ¢ No proliferation of governance - e.g. unless required for
regulated entities and contractual JVs, we would streamline
the number of additional subsidiary Board meetings as far as
possible.
e Single approach to capital allocations and change
management maintained
e Wherever appropriate support structures and technology
should be shared across the group - we are too small to
duplicate costs within each subsidiary
e Employees benefit from a clear sense of customer purpose
3) Great place :
) p and a more entrepreneurial culture
to work e Flexible career structures across the Group, alongside the
opportunity to specialise
4) Tax / e The corporate structure should not be designed solely for tax
Financial or similar financial engineering reasons.
Engineering
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Appendix 2 - Key detailed assessment criteria (not exhaustive)
1) Customer ownership - Ability to ‘own’ the customer and share data across the
various businesses where appropriate, and within customer permissions and
regulatory boundaries
2) Regulation - Consideration of insulation from ‘contagion’ of regulatory
obligations, and potential for regulatory conflicts (e.g. POMS)
3) PCR / other government legislation - Applicability of, and issues relating to,
relevant legislation, e.g. the Public Contracts Regulations (ability to contract with
internal and external parties), Freedom of Information Act, etc.
4) Access to external capabilities / funding - Ability to access external
capabilities and funding (debt / equity); impact on existing funding & State Aid.
5) Attractiveness to potential partners (commercial and strategic) taking into
account POL ownership structure
6) Lia ies - Ability to contain liabilities (corporate debts, fines, pensions
liabilities, etc.)
7) Governance and control - Strategic and operational coherence, efficiency and
effectiveness of governance structures across group
8) Strategic agility - Agility to develop and implement strategies / respond to
market and competitor developments
9) Dividend and cash traps, use of legacy tax assets, VAT etc.
10) Operating model - implications relating to which entities employ Post Office
people, own corporate assets, provide intra-group services, etc.) and an
assessment of increased operating costs arising from the structure
11) Costs and transition requirements to implement the broader future corporate
structure
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Appendix 3 - Current Corporate Structure
Legendgg Existing Entitygg Joint Venture
Appendix 4 - Indicative Future Corporate Structure
fw J mm I
Legend: [ll Existing Entty @ Business Unit [J Proposed / Potential New Entty
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BOARD
Opportunity to I IRRELEVANT I
Authors: Colin Stuart & Chrysanthy Pispinis Sponsor: Owen Woodley Meeting date: 31* July 2018
Context
The Post Office has an opportunity to
r Bol negotiations), Bol has indicated that
This paper sets out the questions we need
nity and provides an interim _ update. Any
heir
potential outcomes, including:
Questions addressed in this report
1. Why should Post Office) IRRELEVANT.
What is the val
aPe.y
What do we recommend and what are the next steps?
Conclusion
where Post Office has a market
stomer, financia
IRRELEVANT
. In conclusion, we recommen i}
once Peregrine is concluded and we have done further work on analysing the
strategic growth opportunities fro n the meantime, we are exploring
opportunities to!
Input Sought
The Board is asked to support the recommend:
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d next steps.
July 2018
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The Report
Why should Post Office consider an
7. FRES is an attractive and profitable busi
the UK market. Post Office generates
could
e In 2017/18, FRES generated profit before tax o giving each of Post
with a leading market share position in
of its profits, and its Retailer business
money. It would give Post Office much mor
money - a market that customers associate with Post Office and its heritage. It
“Customer benefits
12. The foreign exchange market is rapidly becoming more competitive with Fintechs
like Revolut disrupting the market and increasing customer expectations. The
business will need to become more responsive to changing customer needs. This
will demand increased levels of agility and innovation.
13. The synergies off it comfortably with our aspiration to be a relevant
financial services provider and will support building our brand beyond travel services
to a new younger audience:
e The current average age of Azimo, Transferwise, etc. customers in the UK is mid-
thirties. In contrast, over 50% of Post Office customers who buy FX in branch are
over 55 andthe average Post Office TMO customer is 49.
14. From a FRES client standpoint, there are three main groups:
e Wholesale: buy/sell of bulk currency (BofA, MoneyCorp)
e Retailers: High street FX operators such as Post Office, TUI, John Lewis,
Debenhams
e Corporate: Implant bureau locations at corporate premises BAE, Morgan Stanley
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15. We would recommen
Financial benefits
16. Post Office woul
17. FRES profitability will continue to remain challenging (UK YOY cash FX sales are
estimated to be 9% below last year), with many disruptors currently prepared to
forego profits for market share. At the same time, the regulatory environment is
becoming ever-more complex and demanding (e.g. AML).
18. Should we: IRRELEVANT lfuture success will depend on our
Product int@gration Capabinties “ana ability to quickly respond to evolving customer
demand.
Operational benefits
19. On the whole, the FRES structure is representative of Post Office’s whereby it
consists of Exec team, Finance, Legal, Product, Client & Operations, Customer
services, HR, Risk, IT, Back Office, Distribution, Sales & Marketing. Current
headcount is c.280 employees.
20. However, thi
IRRELEVANT
- and there are a number of
onclusion. The progress we have
made in answering those is as follows:
« What is the baseline faci
o For 2018/19 the!”
across the year.
lity and security headroom in our forecasts?
has identified that in-month
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headroom is less than month end by an average oj
the Christmas/New Year period where period end fore
intra period peak is very high, the in-month variance is
However, over
I d he
o The above estimates do not include the impact of Cash Management
Programme headroom benefits of or further opportunities to reduce cash in
the network. These initiatives require further analysis.
e What is the crossover to the Banking Framework and could our banking partners
o The additional estimated network cash to
currently assumed to come from existi
exists to approach banking partners to:
row the banking framework is
e Could we sell another business line (e.g. Telecoms)?
° The Telecoms business is potentially separable and arguably non-core to Post
itial valuation work with Fenchurch suggests a sale value ot I
However, the Telecoms business generates a contribution of more
a year for Post Office, so a disposal would have a significant
impact on profitability and is not recommended.
o The other potentially separable busi Office Insurance. Internal
valuation work suggests a value ot However, Post Office
Insurance is core to Post Office’s strategy and much of its value lies in how
we can develop it - disposing of the business now is not recommended.
Would we seek to,
a third party be able t
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What do we recommend and what are the next steps?
28. In conclu i ith dvisors, we do not think now is the right
3, for the following reasons:
to Post Office, and how we should ma
ge the business.
IRRELEVANT
29. We recommend progressing the Peregrine discussions to achieve,
we manage it, This can cover:
a. Work with Bol to
b. Work with FRES to better understand areas of growth, e.g. pursuing
opportunities in the Retailer space
___ IRRELEVANT
I eS IRRELEVANT I
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Appendix 1: FRES P&L
Budget 19/19
Sets
IGross Trading Income
POL Fee
Net Trading Income
[Actual 17/18
Sets
IGross Trading Income
POL Fee
Net Trading Income
Appendix 2: Potential Synergies (preliminary view)
Applied
to
cost synergies £m Rate
Benefit Access
Total positive synergies
Total net cost synergies
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POST OFFICE LIMITED NOTING PAPER
BOARD
Update on Project Everest
Author: Jeff Lewis Sponsor: Rob Houghton Meeting date: July 18, 2018
Context
Everest is the Fujitsu renegotiation strategy constituting a revenue swap agreement
which reduces operating expenses in return for committing our cloud and digital
development strategy for the upgrade of the Horizon platform with Fujitsu. A
Memorandum of Understanding (MoU) was signed with Fujitsu, November 2017. The
MoU enables Post Office to break the fixed price nature of the Horizon Agreement,
reduce operating expenses and reinvest the savings in strategic cloud and digital
technology. This paper details the progress on implementation of the MoU principles,
and the next steps
Questions addressed in this report
1. What has been achieved since signing the MoU?
2. What are the open items and how are they being completed?
3. What is the value of operating expense savings secured?
Conclusion
Project Everest has achieved a positive result in respect of its original objectives, with
a number of change notes signed or ready to be signed. These meet the goals of
breaking the fixed price model, securing future digital IP, securing Fujitsu as a digital
partner and delivering significant operating expense reductions in Application Support
and Maintenance. Due diligence and agreement on the move to the new cloud
platform (Azure) will be completed by end August. Embedding the new services and
models and driving cultural change will be delivered through a BAU project.
Input Sought
We invite the Board to note that we will:
e close Everest, complete transition and embed the new service models / operating
processes through a BAU project
e separate out the Belfast and run this as a programme which will seek separate
agreement from the board.
The Board has already agreed the principle of moving to variable cost and migration to
Azure, the Belfast exit programme will set out how and when this should take place.
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What has been achieved and signed since MoU approval?
1. The ability to redirect committed contractual spend out of operating expenses
into new capital expenditure for development of the Horizon platform on
strategic technologies.
2. The move to a variable based charging model from effectively 95% fixed capacity
model.
3. Substantial reductions in charges for the Application Support and Maintenance
(ASM) operating expense charges for “legacy Horizon”, where we currently pay
>£9m per annum:
e Creation of development capacity from within current ASM service, to work on
agreed capital projects, reducing operating expenses by up to £3m per annum
(£13.4m in total.) Post Office and Fujitsu will cooperate to optimise the use of
the development capacity across the Post Office IT change portfolio.
e Guaranteed reduction of operating expenses of £6m (2018/19 - 2022/23)
through operational efficiencies driven by an investment.
e Target incremental reduction in operating expenses as we move to new digital
/ thin client applications from HNGA. Post Office target total savings £2-4m.
4. The principle that Fujitsu will be our digital development partner under a Digital
Development Services (DDS) contract and Post Office will commit to a level of
revenue for reduction in the development charge rates.
e Contract and schedules agreed;
e Charge rates for all services represent 25% reduction against the time and
material rates paid prior to DDS;
e The day rates for DDS have been benchmarked against Gartner data and are
mid-range (average) against market rates for UK custom development;
e Outcome based delivery with performance remedies for Post Office; and
e Post Office commits to a minimum spend on DDS projects of £21m over 3
years. This is primarily filled through HNGT/ Solar and Agent Portal and
“commissioned” in line with approved business cases.
5. The principle that PO will own all IPR for digital developments.
What are the open items and how are they being Completed?
6. Changing the cultural ways of working - limited progress from both sides, witha
mix of strong change agents and reticent behaviours. A renewed emphasis will
be placed on achieving this, using the transition to and embedding of the
operational changes as a focal point. Joint initiatives will potentially include,
leadership team and delivery IT briefings, mixed team risk mitigation workshops
and participation in each other’s internal communications.
7. Next phase of Belfast Exit and migration to Azure is undergoing further due
diligence. The next steps are:
e Understand the guaranteed hosting / related services savings, and ensure
that these are aligned to the original commitments made (for K5);
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e Understand the assumptions that are driving a forecast late delivery into
Azure (May 19);
e Fujitsu committed that Post Office would not have to pay for cloud
enablement costs in Azure, having already paid for K5. Ensuring the
parameters around this principle are clear, agreed and delivered is part of
the due diligence work; and
e Once agreement of a plan and associated costs are agreed we will proceed
to a phased implementation under specific work orders.
8. In line with the revenue switch principles, Post Office will contract for capital
projects to meet the committed Fujitsu contractual spend. Excluding 2017/18 and
the IPR this value is approximately £80m. This commitment will be managed
closely to mitigate any risk of underspend.
What is the value of the agreed Changes?
9. The benefits and risks from Everest are generally in line with the expectations
from the May update. The overall operating expenses reduction is £35 -£38m for
2017/18 - 2022/23.
10. At the May Board we presented an aggressive target of £42m operating
expenses reduction (from £141m to £99m). The reason for the difference is that
Fujitsu were not prepared to commit to all of the revenue switch targets Post
Office was seeking.
11. The Contract Change Note to be signed for ASM will generate £19m of operating
expense savings up to 2022/23, with the potential for a further £2-4m as Post
Office moves to a digital application service base.
12. The target savings from a move to cloud is £14-15m over the same period.
13. This represents a 30% reduction for 2018/19 to 22/23, including in year savings
of £4.0m.
Everest Opex status - Jul 18 2017/18 2018/9 2019/20 2020/21 2021/22 2022/23 Total
£m £m £m im £m £m £m
Contracted Opex 249° 244 23.6 229226 = 22.6 141.0
AS&M Opex to Capex (25) (28) (27) (2.7) (2.7) (13.4)
ASM Contracted Savings (5) (4.5) 1.) (4.0) (4.0) 6.0)
Agreed Contract Changes Sub Total) 289 204 9 193/192 I 18.9 I 18.9 421.6
Guaranteed Cloud Savings -15% - (0.7) (2.1) (2.1) (2.1) (7.0)
Target ASM savings -HNGA outcomes : (05) (10) (1.0) 28)
Target Cloud Savings - 15% - (07) @4) 21) 2.) 7)
Existing Services Sub Total 9 204 179 145 13.7 13.7 105.1
14.
In order to meet the overall contractual spend commitment an equivalent
increase in capital expenditure is required and this shift is demonstrated below.
The increase in overall spend was agreed at May Board.
Total Fujitsu Spend£m Contracted
lOpex 141.0
Capex 547
Total Spend 195.7
Everest
105.1
100.5
Everest
Var
(35.9)
457
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Page 1 of 5
Back Office Transformation
Authors: Tim Armit, Benjamin Cooke, Michael Clements, Sponsor: Alisdair Cameron Meeting date: 31 July 2018
Executive Summary
Context
In May, the Board approved a revised plan for the removal of POLSAP, with go live in September
or October, recognising that September was the first possible date, with no contingency.
Agents Pay is already operating on the new systems. Cash processing is working in Belfast. The
main future delivery is ensuring that sales and cash data will be delivered to and processed in
SAP CFS and Transtrack CWC without going via POLSAP, enabling cash management and
forecasting, settlement and billing with clients and financial reporting.
Questions addressed in this report
1) What progress has been made and when is go-live expected?
2) Should we invest to stabilise POLSAP infrastructure?
3) What assurance will we have that we will go-live safely?
4) How would we recover if we went live badly?
Conclusion
POLSAP process migration has progressed in line with the revised plan, with integration testing
now in Phase 3 and data validation testing having completed two cycles, with 99% matching
and all differences explained. Cash processing is in Phase 2 of Integration Testing.
A systems design change in Transtrack had a knock-on impact on the design of four Horizon
interfaces. This has delayed testing and made September go-live impossible without a
compromise on testing standards.
Two issues are being worked through to ensure October go-live: ensuring that high-volumes of
data can always be processed within the overnight time frames; and resolving some specific
issues within cash forecasting to ensure that the right denominations can be sent to individual
branches.
POLSAP infrastructure has remained stable and we have more than 6 months’ worth of spares.
As a result the CIO has recommended and Steering Group agreed that we do not invest in an
upgrade now. This is being continuously monitored.
The original re-plan was necessitated following a full review of proposed testing. We believe that
our test approach is complete and provides assurance. Deloitte has reviewed the re-plan and
has not recommended any material changes. In addition, we have commissioned DMW to review
the test approach to ensure we are covering all bases.
Prior to go-live we will be getting additional assurance from Accenture’s QA team over the
deployment plans and will ask DMW to validate test results against our go/no-go criteria.
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The Go/No Go criteria will give substantial assurance that the new systems are operating. We
will have observed two days’ live trading posted to CWC and CFS with settlement and billing
calculated, cash movements processed and trial balance produced and matched. If we can’t see
these things operating, we will not go live. We will therefore have a high degree confidence that
our basic operations will work and that errors and issues will be specific and capable of being
resolved.
Nonetheless, we have assumed the worst and considered how we would manage in the event of
failure. Reverting back to POLSAP would be difficult and would not be our preferred route unless
the failure was very rapid and significant. Our assumption is therefore that we would seek to
manage and fix.
These are not customer facing systems and in the event of failure there will be no direct or
material customer impact. All of the activities including settlement have had to operate manually
at some point and workarounds are available. For example, we can pay clients from Horizon and
Credence data - and sometimes do so. We can estimate agents pay based on similar data and
the prior month, etc.
The greatest challenge will come if we have to operate manually for an extended period. We
will increasingly have to fund the branches to a higher value to ensure no one runs out of cash,
reversing recent efficiency gains. We will struggle to resolve branch imbalances.
In the event of an extended period of manual working, the biggest challenge will be reconciling
balances and resolving issues retrospectively as the team will be focused on managing BAU. We
are therefore exploring with Accenture whether we should create a capacity offshore to trigger
additional resolution support if needed.
On this basis we plan to continue working towards October go-live.
Input Sought
The Post Office Board is asked to note the contents of this report, requesting additional
information as appropriate.
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The Report
What has happened since last update?
1.Since the last board update the project has made significant progress. Our future
processes/systems are demonstrating their readiness through end to end integration
testing:
* POLSAP Process Migration Project is now into Integration Test Cycle 3 and Data
Validation Test Cycles 1 and 2 are complete, including settlement data validation
to the satisfaction of the business (>99% match with all differences explained)
* Cash Processing Project is now into Integration Test Cycle 2 with Cash Forecasting
volume testing starting
2.Challenges have occurred in 3 areas that prevent a September Go-Live:
¢ Horizon Interface delays: A late system design change had a knock-on impact
on 4 Horizon interfaces, with adequate time for re-test this pushed our critical
path to 8" October at the earliest.
e CFS High-Volume performance: Settlement & billing processes are working as
designed, yet at the scale of 1.5m transactions per day new challenges have come
to light and are being worked through (good progress is being made on this topic)
e Cash Forecasting: The new approach is very different to Post Office’s current
manual method - as test data is loaded in new requirements have occurred that
may not be simple to deliver but may have a negative impact on cash balances
post-live. These need evaluating and testing at scale.
3.Full clarity on two of the issues is not expected until the end of July, so will have more
confidence in answering this question in August. Based on this uncertainty, five potential
go-live dates are being evaluated from October to February.
Should we upgrade POLSAP infrastructure?
4.POLSAP is a business critical system used to settle £60bn to clients each year and manage
~£600k per day of cash across our network. A number of components sit outside our
desired risk tolerance. In parallel to Back Office transformation a number of mitigation
actions have taken place both to reduce the likelihood of failure and increase our resilience
to component failure including: increasing onsite spare part stocks, holding “hot” spares,
migrating to the new Belfast network and changes to working practise.
5.Whilst POLSAP remains outside of our desired risk tolerance the mitigation actions taken
have improved our position since our last report, and none of the statistics being monitored
have worsened. Post Office’s IT leadership and the Fujitsu (infrastructure) and Accenture
(application) service management teams are confident on their ability to continue to run
the application until at least March 2018, likely longer. This position will be monitored
monthly and should any of the underlying fundamentals change we have a prepared
upgrade/migration fall-back plan, with enough spares to be confident in keeping the
system stable until it delivers.
Why do we think when we do go live, we will do so safely?
6. By the time we go-live the program will have conducted stringent testing, met our Go/No-
Go criteria, and completed a deployment activity which proves new functionality is
operating before choosing not to continue POLSAP and releasing the new systems.
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7.3" party assurance has completed for our plans, is underway on our test coverage and
scheduled for our detailed deployment approach. Further detail on this assurance and our
Go/No-Go Criteria is included in the appendices.
8.The diagram below shows the impact of designing POLSAP out of our architecture. The
POLSAP Process Migration and Cash Processing projects are mostly distinct but must Go-
Live together.
As-Is, July 2018 Future State, October 2018
Procurement 2a”
9.There is no change occurring to systems that interact directly with Post Office customers.
In the worst case, our fears are that the Post Office would be unable to:
* Settle to clients
e Forecast and supply adequate cash to branches, potentially leaving customers unable
to withdraw funds
«Report accurate financials
We have plans for the worst eventualities and are working hard to ensure that they cannot
occur.
Test Summary
10. Each project is conducting the following testing:
e Process - 950 end-to-end process script per cycle, SIT1, SIT2, SIT3 & UAT
¢ Data - 3 data extract, transform, load and validate cycles
e Performance - High volume process testing at peak loads
11. Specifically, for our highest risk areas we will have demonstrated:
¢ Cash forecasting using actual historical data comparing the 13 week forward forecast
against our POLSAP’s forecast.
« 2 months of historical production Sales/Settle/Bill data validated against actual
payments
12.We have engaged DMW to provide external assurance that our test scope adequately
covers everything it should, they will also validate our results. Appendix 1 contains an
overview of all our external assurance, which includes an Accenture QA on our
deployment plans. Should testing not be complete - the project will not be able to meet
our Go/No-Go criteria, also included in the appendix.
Deployment Summary
13.Deployment occurs in stages:
© Technical - All infrastructure changes and most code/configuration will be deployed
in a” technical Go-Live” weeks before our business cut-over, when our processes
migrate off POLSAP.
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¢ Business - During the business cut-over there are checkpoints throughout the
weekend. At each if our agreed criteria are not met, we are able to roll back to a
restore point (Friday noon) and abandon the Go-Live attempt.
First Checkpoint: All data is loaded and validated, interfaces activated, systems
technically ready.
Once this is passed the systems will begin operational catch up, interfaces that have been
held since Friday will be run and results posted into the system. Business teams will
conduct staged transactions to confirm systems are operating as expected.
Second Checkpoint: Friday and Saturdays trading data is posted with settlement and
billing calculated in an acceptable time window, cash order forecast matches
expectation, cash movements and branch REMs process from Horizon to CWC to CFS,
trial balances for P&L and balance sheet match expectation, users can access from all
key locations.
Only once this checkpoint is past, is the system released to all users. At this point restore
to Friday noon with POLSAP processes is planned and achievable.
14.Due to the volumes that will have processed through the system by this point we can
now be sure that the solutions are broadly working as designed. Smaller issues can occur
in the following days e.g. an interface file from a 3" party not arriving on time, just as
happens today. These will be resolved by the project early life support team in
conjunction with our service operations team - who face these types of challenges
regularly.
What will be impacted if something goes wrong, and what are
our plans to deal with it?
15.Our business teams are confident that should the worst occur and significant system
functionality be impaired, they could survive tolerably for 2-3 weeks. Their confidence
comes from the reality that system failures over the past years have meant these plans
have previously been put into action. The only possible customer impacts are A) the
branch/ATM not having adequate cash, or B) customer transaction corrections slowed.
16. The table at appendix 2 outlines our resolution approach in the business areas identified
as most critical.
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Independent assurance received, underway and planned
A number of 3™ party assurance activities have been carried out and are listed below.
Purpose: Project Delivery
Program Review Mar 2018. Scope of review included plan, resource
and whether the program had implemented adequate measures in
response to the root cause analysis conducted following slippages in
Cash Processing and POLSAP Process Migration.
Partner: Deliotte
Program Review May 2018. Scope of review included updated plan
and response to previous review and lessons learned.
Purpose: Process & Technical
Design/Solution review Aug 2017 - SAP conducted a review of our
intended process design using the Agency Business (AB) module and
the integration approach for largest interfaces. The report is attached
and we took their recommendations. We have retained SAP expertise
and assurance across our AB delivery (2-5 days a month) as the
module is not very common. The assessment and recommendations
are attached. They have remained involved in the program for a few
days a month as we have moved forward assisting with design
decisions relating to Agency Business (AB).
Partner: SAP
N/A
POLTFC ReportFin
‘aL 2017W33.pdt
Infrastructure Sizing Assurance - Initially engaged in 2017 but placed
on hold as SAP's tools provided wildly different results based on small
changes in our predicted transaction volumes. May be re-engaged
following our high volume testing (end July) if required, we are
currently in the process of taking our own measurements.
None
None
SAP Go Live Checks (standard service for SAP Go-Lives) - Scheduled
for shortly prior to Go-Live
Information available
online “SAP goinglive
Pre-Go-Live
check”
Post-Go-Live Monitoring Support (standard service for SAP Go-Lives) ‘one week post go-
= one week post go-live live
Purpose: Test Coverage Partner: DMW
DMW have been engaged to focus on (a) is the overall programme Sow Report
test approach adequate and (b) does the test coverage provide =,
sufficient confidence to deliver the quality outcomes required. 31® July
MW BOT OA
DMW will also be engaged to validate that key test results have met
our Go/No-Go criteria. Scope to be agreed following the above. Requested End Aug
Purpose: Deployment & Go-Live Readiness
Accenture’s QA team will be conducting a review on the project
focused on our deployment plans, in the first week in August.
Partner: Accenture (al:
delivery partner - but QA team not project
team used)
TOR
BOTQA-
Iso major program
Report
Deployment Approa
Go/No Go Criteria
The program has stringent Go/No-Go criteria agreed with the Steering Committee. These are
tracked in the lead up to Go-Live each requiring approval from responsible owners across the
Post Office outside of the project team. Go/No-Go deployment meetings are planned with the
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Steering Committee prior to starting deployment activities, and at various checkpoints in the
deployment process (outlined in the next section). If the project has a material deviation from
the set criteria, go-live will be postponed.
The project is subject to Post Office’s “One Best Way” methodology. Prior to going live “Gate 4”
approval is required, at this juncture nominated resources from all business departments have
to confirm their readiness. The project Go/No-Go decisions are in addition to this process — just
prior to key technical steps occurring.
Test Criteria
'No major or critical defects outstanding.
IT Service Criteria
tested in peak hour load
SIT LIL,IIt All regression testing complete and Early Life Support (ELS) In place & agreed by all parties
passed
No major or critical defects outstanding.
var All regression testing complete and Keowledge Transfer (KT) I All Knowledge Transfer (KT) &
passed
Forecasting/High I Key end user processes e.g. forecasting Helpdesk ready, routing confirmed,
Helpdesk readiness
knowledge articles in place
Volume (CPT)
High Volume
Testing (PPM)
‘Two months validation for settlement and
billing against live historical data
Support agreements in
place
Third Party support in place
Data Criteria
Deployment
Data objects
ready for Scope of migration defined Deployment plan agreed Signed-off by key stakeholders
migration
Data Trail Run Toad programs, extraction, Rollback plans & Plan to ensure how to roll back and
111,11 transformation, load & validation tested _I checkpoint decisions clear_I when if a no decision
‘Open Items Clean
up
Open items reduced to 200,000
Configuration/Code
changes ready
Finalised transport / config List
Dress Rehearsal
Data objects loaded in time during
deployment dress rehearsal.
Dress Rehearsal complete
Signed-off by key business
stakeholders
Data Privacy
Impact Basement
(PIA)
Project Governance
PIA signed-off by Data Protection Team
Deployment
Infrastructure ready
Infrastructure uplifted as per re-sizing
specification and signed of.
Architectural
Review Committee
(ARC)
ARC approval
No IT Security concerns
Penetration Tests show no Medium,
High or Critical risks without
remediation
‘System resilient and
High availability and disaster recovery
activities.
Gate 4 ‘One Best Way "- Gate 4 Approval recoverable solutions are ready.
~ 7 Technical operations teams have
Technical Operations documented and understood
ready
processes
Performance demonstrated at appropriate
Technical scale for key processes, interfaces, end Local Infrastructure / aes sae Hi tees are
Performance user activity and batch/system admin Peripherals BI petiP!
in place
Comms ready
All comms planned, prepared and signed
off
Business Readiness
Post-Live contingency
planning ready
Plans in place for late no-go decision
Role design
signed off
Signed off user role design
All users trained
Users trained to a satisfactory level
Roles assigned
Users created and roles assigned
Business rea
complete
Business ready for go-live
Client Comms
‘Comms planned, prepared and signed off
Appendix 2
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Risk Examples Resolution Approach
Impact
Likelihood
The cash forecasting module and planned Branch Cash
deliveries/collections are being tested against our current cash
forecasts using 2 years of historical data. At least 2 complete
Branch runs out I months must have been checked as accurate (i.e, not leading
of cash - to a branch cash out, or funding increase) to meet our test
customer Go/No-Go Criteria.
unable to
Cash access Historical data will be loaded into the system prior to Go-Live,
Forecasting 2 I 4 and interfaces checked during cut-over. A simulation forecast
Fails Branch cash of planned orders will be checked during deployment, before
increases, lifting I the system is released to all users. At this point rollback to
Post Office POLSAP remains an option.
funding
requirement POLSAP plans orders for 13 weeks and Christmas cash orders
are created in October in advance, hence should the orders be
inaccurate, they can be manually over ridden for 3 months
whilst issues are resolved.
Settlement and billing calculations are being checked with real
historical data for a 2 month period to confirm accuracy and
processing performance. These will need to be confirmed as
Unable to settle I 2¢curate to meet project Go/No-Go criteria.
pale rellenitss During deployment 2 days of trading data will be run through
Unable to bir I CFS 28 catch up. These will be processed and checked before
Client clients the system is released to all users. At this point rollback to
settlement & 2 3 POLSAP remains an option.
billing fails
Settlement or I 1¢ failure does occur the business has a tried and tested
billing a ,
peroied method of paying clients from the underlying Horizon and
vettcurataly _I Credence data. This can operate for an extended period. The
greatest challenge would be reconciling extended data sets as
CFS came back online, To that end we are working with
Accenture to have a team ready to support this activity should
it occur.
‘Agent Remuneration processes are not being changed at this
Unable to Go-Live, however they are subject to regression testing (as
accurately with all CFS functionality).
‘gent calculate agent
1 I 3 I remuneration I Agent pay runs a month behind actuals. The Agent pay run
Remuperation will be readied before go-live and held off system (or paid a
Unable to pay _I couple of days early, depending on the actual Go-Live date),
agents to ensure Agent payments can be made even in the case of
system failure.
The transaction corrections system is being copied over as-is
from POLSAP and has already completed 2 system integration
A customer :
customer pays a £150 bit) I tests; with UAT planned.
Tae 2 I 4 I In branch, but I 1 the system is unavailable for some reason, Customers
Corrections the Post Master 4 7
whose bills have not been fully settled will have their accounts
updated directly with our clients, but the Post Office and
Branch accounts will require reconciling and updating later.
only keys £15.
Strictly Confidential
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UKG1I00043683
POST OFFICE LIMITED
BOARD PAGE1OF 3
Post Office Limited Sealings
Author: Veronica Branton Sponsor: Jane MacLeod Meeting date: 31 July 2018
Executive Summary
Context
The Directors are invited to consider the seal register and to approve the affixing of
the Common Seal of the Company to the documents set out against items number
1682 to 1696 inclusive in the seal register.
Input Sought
For the Directors to resolve that the affixing of the Common Seal of the Company tothe
documents set out against items numbered 1682 to 1696 inclusive in the seal register
is hereby confirmed.
Strictly confidential
UKGI00043683
UKGI00043683
POST OFFICE LIMITED
Date Register of Sealings Company Number
25.07.2018 21554540
Seal Number Date of Date of Persons Attesting Destination of
1 File Ref. Sealing Authority Description of Document To Document Document
1682 / 23/05/2018 18/05/2018 I Underlease relating to Post Office, 47 Cheap Street, Sherborne, Dorset I Jane MacLeod, Company Secretary I Jean Reynolds,
Underlease DT9 3AT between Post Office Limited and Timothy Nigel Blackburn.
7683 / Tenancy 30/05/2018 24/05/2018 I Tenancy Agreement in respect of 138 Stoke Newington High Street Jane Macleod, Company Secretary I Jean Reynolds
‘Agreement London between Post office Limited and Universal Office Equipme nt (UK)
Limited.
7684 30/05/2018 24/05/2018 I Rent Review memorandum between Royal Mail Group Limited and Post _ I Jane Macleod, Company Secretary I Jean Reynolds
Office Limited in respect of East Kirbride Deliver Office, 15 Cornwall
Street, East Kirbride. Please note this was executed under signature
rather than seal owing to Scottish law.
7685, 79/06/2018 Honiton Crown Post Office - Deed of Release of Dilapidations. Jane Macleod, Company Secretary
7686 03/07/2018 03/07/2018 I Filming Licence - Post Office, Bishops Stortford Jane MacLeod, Company Secretary I Jean Reynolds
1687 10/07/2018 10/07/2018 I Deed of Surrender relating to Ground Floor 118/120 Queensway, London I Jane MacLeod, Company Secretary I Jean Reynolds
W2 between:
1) MB QW (Guernsey) Limited; and
2) Post Office Limited.
7688 TOO7I2018 70/07/2018 I Lease relating to premises known as Ground Floor, 118/120 Queensway, I Jane MacLeod, Company Secretary I Jean Reynolds
London W2 between
1) MB QW (Guernsey) Limited; and
2) Post Office Limited
7689 70/07/2018 70/07/2018 I Deed of Surrender relating to an underlease of part of premises known as_I Jane MacLeod, Company Secretary I Jean Reynolds
Queensway MSPIEP, 118/120 Queensway, London W2 between:
1) Post Office Limited; and
2) Royal Mail Group Limited
7690 0107/2018 70/07/2018 I Licence to underlet relating to a lease of the premises known as Ground I Jane MacLeod, Company Secretary I Jean Reynolds
Floor, 118/120 Queensway, London W2 between:
1) MB QW (Guernsey) Limited;
2) Post Office Limited; and
3) Royal Mail Group Limited.
7697 TOI07/2018 70/07/2018 I Lease relating to part of the premises known as Queensway MSPIEP, Jane MacLeod, Company Secretary _I Jean Reynolds
118/120 Queensway, London W2 between:
1) Post Office Limited; and
2) Royal Mail Group Limited.
7692 70/07/2018 10/07/2018 I Licence to occupy relating to Units 21 and 22, The Kingstanding Centre, I Jane MacLeod, Company Secretary I Jean Reynolds
Birmingham, B44 9HH.
7693 70/07/2018 10/07/2018 I Agreement for Sale relating to 7-9 Church Square, Leighton Buzzard, LU? I Jane MacLeod, Company Secretary I Jean Reynolds
1AA
Register of Sealings
Page 2
UKGI00043683
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POST OFFICE LIMITED
Date Register of Sealings Company Number
25.07.2018 21554540
‘Seal Number Date of Date of Persons Attesting Destination of
I File Ref. Sealing Authority Description of Document To Document Document
1694 70/07/2018 10/07/2018 I Licence for Alterations - premises at Ground Floor, 37 Church Lane, Jane MacLeod, Company Secretary I Jean Reynolds
Pudsey, LS28 7LB
Seal x 3
7695 TO07I2018 10/07/2018 I Deed of variation relating to Pudsey Do/CO, 37 Church Lane, Pudsey, Jane MacLeod, Company Secretary I Jean Reynolds
Ls28 7LB between Royal Mail Estates Limited and Royal Mail Group
Limited and Post Office Limited.
7696 70/07/2018 10/07/2018 [Licence for Alterations relating to Ground Floor, 37 Church Lane, Pudsey I Jane MacLeod, Company Secretary I Jean Reynolds,
LS28 7LB, between:
1) Post Office Limited;
2) TNB Training Limited; and
3( Richard Mark Butcher and Carol Butcher.
Register of Sealings
Page 3
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POST OFFICE LIMITED PAGE 1 OF 2
BOARD
Performance Review - Health & Safety
Author: Martin Hopcroft Sponsor: Al Cameron Meeting date: 31% July 2018
Executive Summary
Context
1.1
1.2
Keeping our employees healthy and safe is fundamental to Post Office success.
This is reflected in the Post Office Board’s legal responsibilities and members of
the board have both collective and individual responsibility for health and safety.
We have a rolling 3-year plan to drive compliance, targeting a reduction in safety
metrics including accidents; lost time accidents (LTIFR); days lost; and personal
injury claims. Our H&S reporting and safety management system has been
externally audited and we also recognise the importance that wellbeing can play
in creating engaged and motivated employees.
Questions addressed in this report
Qed,
It has been agreed to provide a monthly performance report to the Board for
noting and a more in depth Health & Safety deep dive report 6 monthly.
Conclusion
3.1
3.2
3.3
There has been a good start to 2018/19 and a 54% reduction in accidents
reported in Q1 compared to 2017/18 (19 v 41) and a 75% decrease in Supply
Chain (6 v 24). Accidents per 1000 employees have also reduced by 52% with
Supply Chain reducing to 7.5 from 29.2. Lost time accidents have also reduced
and the P3 YTD LTIFR is at 0.142 compared to 0.357 in 2017/18. Total lost days
are 38 compared to 152 in 17/18.
The Supply Chain safety plan is progressing well with the introduction of Safety
Champions, forums and review of local risk assessments and safe systems of
work. Further workshops are planned to support development and share best
practice, and external IOSH training planned for Q2.
We have seen a reduction in road traffic accidents in line with the 41% fall in
fleet size. We are hoping to see further improvement through the introduction
in Supply Chain of Telemetry which is now in place (tracking and analysis of
driving performance) and Alcolock (breathalyser integration with key
management). A draft overarching Road Risk Policy is being developed and
shared with Safety Board, HRDs and presented back to Ops Board in July.
Concern has recently been raised that some drivers (Commercial and Business)
are not complying with the ‘use of mobile phone whilst driving’ policy. A
communication is being issued with additional compliance checks planned to
reiterate the requirement to undertake online training.
Strictly Confidential Health & Safety Report July 2018
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POST OFFICE PAGE 2 OF 2
3.4
3.5
3.6
A recent risk has emerged in respect of the Company Car Vauxhall fleet with
concerns that a safety mechanism in the engine management system creates
unacceptable risk for drivers whose cars lose power, sometimes at high speed.
Diagnostic checks were arranged for Vauxhall vehicles and a decision has been
made to replace all ‘64’ plate Vauxhall Astras with drivers being invited to renew
cars.
CViT attacks remain low with 19 incidents over the last rolling 12mths compared
to 24 during the previous 12mths. There were 2 incidents in May with one minor
injury. Post Office robberies were also lower over the last rolling 12 mths at 136
(v 158). Whilst the number of robberies per 000 stores remain low compared to
the Commercial Victimisation Survey 2016 reporting an industry level of 13.8%,
we are still seeing an increasing trend for POL robberies / attempts from 1.47%
in 2015/16 to 2.19% in 2017/18. We therefore forecast an increase based on
this recent trend. The Board have agreed to support recommendations from the
recent Post Office review of robberies and violence. These include; Fogging, IP
cameras, CCTV, endgates, body cameras, flip top tills, additional analysis of
violence and aggression with improved training for employees and sharing best
practice and guidance with Agents. A plan and business case is being developed.
Further planning for upgrades has been undertaken, branches profiled and
identified for appropriate solutions in preparation for a roll out plan.
The overall level of Property risk is predominantly low. An independent audit of
Property Statutory Compliance is being procured. Current compliance is very
good at 97%. Following recent incidents, gas cookers have been removed and
CBRE are checking all appliances eg. microwaves, cookers, portable heaters
during monthly maintenance visits. External statutory risk assessments (Fire,
asbestos, legionella) have been undertaken and remedial actions are being closed
by PiCs and CBRE. The H&S BPs are offering support and will provide regular
updates to Ops Board.
Input Sought
The Post Office Board are requested to note the current health safety performance
and content of this report.
Strictly Confidential Health & Safety Report July 2018
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POST OFFICE PAGE 1 OF 2
Appendix 1
The Report - H&S Metrics - P3 (June) 2018/19
Number of Employee Accidents - Monthly - Period 3 Directly Managed Branch
(Target to achieve a 5% year on year reduction) Accidents P3 YTD
25
20
. I I By
10
Year to Date
5 = 16/17 12
hi h =17/18 13
oR RBRBRREREEBREBEEBEEE = 18/19 12
P1 P2 P3 P4 PS P6 P7 P& PI P10 P11 P12 Supply Chain
Accidents P3 YTD
2016/17 @ 2017/18 2018/19
There were 6 employee accidents in P3 18/19 compared to 9 in P3 17/18
DMBs - There is a slight reduction to 12 accidents YTD in DMBs from 13 in 17/18.
Causation is due to slips, trips and falls, stepping/ striking.
Supply Chain - There was a marked reduction of accidents in Supply Chain to 6 II
in QL 18/19 from 24 during Qi 17/18.
The Supply Chain Safety Plan is being progressed and 3 workshops have been NeatitoiDate
held for Safety Champions who are being given certified H&S training, sharing =16/17 1
best practice, lessons learnt and promoting safety culture. Formal IOSH training e17/18 23
has been planned for August and September. =18/19 6
There has been 3 lost time accidents in 2018/19 incurring 38 total lost days.
Cumulative Trends per 000 employees can be seen below. Road Risk
Total days lost due to accident / P3 18/19 - 4 RTCs
000 employees - Cumulative
100.0 Blameworthy - 4 (poor observation,
judgement of 3” party positioning when
a0 manoeuvring).
Non Blameworthy - 0
60.0 Initiatives include:
- An overarching Road Risk Policy, with
40.0 improved training and compliance
checks and maintenance checks is
being developed by the Fleet
20.0 Management team to cover
rae Commercial Fleet, Business Cars &
0.0 ua Personal Car use.
P1 P2 P3 Pa PS P6
- Scoping products to alleviate fatigue
and support aging work force.
2015/16 2016/17 2017/18 2018/19 - Online Driver Training has been
developed and launched _—_for
employees who drive on business.
NEAR MISSES
DMBs - Nil Checks against mileage claims are
Supply Chain - 3 near misses (2 Fork lift incidents & 1 external HGV hitting being undertaken and
roller shutter door) recorded in June. One driver undertaken refresher training communication being issued to line
and an investigation into a cage design is under way at Swindon Stock Centre. managers to close gap.
Strictly Confidential Health & Safety Report July 2018
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POST OFFICE PAGE 2 OF 2
LTIFR - Lost Time Incident Freq Rate All Post Office - Employee
1.00 LTIFR P3 YTD
0.80 YTD P3 - 0.142
2017/18 out turn - 0.271
2018/19 target - 0.200
0.60
Benchmark - 0.300
Absence accidents/000 SiP:
0.40 0.61 YTD v 1.38 (YTD 17/18)
0.20
> \ Supply Chain - Employee
0.00 LTIFR P3 YTD
PL P2 P3 Pa PS P6
.LTIFR DMB. LTIFR Supply Chain LTIFR Post Office LTIFR Target YTD P3 - 0.571
2017/18 out turn - 0.820
2018/19 target - 0.500
Benchmark 0.600 (BSIA update Q2)
Post Office CViT Robberies — P2 Absence accidents/000 SiP
There were 2 incidents reported in May v 1 in 2017/18 and there have been 19 I 2.51 YTD v 2.43 (YTD 17/18)
incidents v 24 over previous 12 rolling months. Trend is being monitored closely.
Violence has been used in 1 incident in May with an injury incurred. 2 used
weapons v 3 incidents in P2 2017/18. Post Office (All branch types)
oo Robberies - last 6 mths:
Current mitigating activity: Dec - 11 incidents v 20 (16/17)
- Industry hotspot area in Merseyside, Security Manager working closely with I jan - 12 incidents v 22 (16/17)
police to provide as much van coverage as possible. Feb - 12 incidents v 15 (16/17)
. Operation Guardian industry meeting attended on Merseyside to discuss I Mar - 9 incidents v 11 (16/17)
current spike in activity and potential mitigations. Apr - 6 incidents v 12 (17/18)
- 74 Cross Pavement Observations made by Security Managers during period, I May ~ 7 incidents v 14 (17/18)
with the majority in high risk areas. 129 robberies current rolling 12 mths v
- Operation Stripe test conducted at London Depot and passed successfully I 164 Previous rolling 12 mths
by Depot staff.
- Male arrested and remanded in custody in relation to 2 CViT Post Office
incidents in West Midlands in February and May.
P2 2018/19
Violence - 0 vs 0 last year
Injuries - 1 vs 2 last year
Weapons - 4 (0 firearms, 2 blades) vs
Rolling CVT incidents 13 last year (3 firearms, 8 blades).
s Ongoing programme of __ security
presentations/training delivered by
Security Managers to Multiple partners.
59 branches visited during period (mainly
2 high risk locations), as part of the
Operation Torch programme to ensure
security compliance in key areas.
ol
P23 PH) PS PGT PBS PIO PALO PAZ PLP
In P2 there was a reduction in weapons
used with 57% of incidents involving a
weapon, this compares to 92% in P2 the
previous year.
m= Current Rolling 12 Months = Last Rolling 12 Months
Rolling Robbery Incidents
= In P2 there was one injury, this was a
20 result of the PM being pushed over during
the incident.
as The deployment of fogging and IP
cameras is aimed to reduce robberies and
the associated risks, as noted zero
s injuries, where activated
10
PS Pa PS PG OPF PSPS PIO PAZ PLP
Current Roling 12 Months wast Roling 2 Months]
Strictly Confidential Health & Safety Report July 2018
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POST OFFICE Limited PAGE 1 OF 1
BOARD
Post Office Limited Board Meetings
Executive Summary
Context
The Directors are requested to note the future meetings dates scheduled in respect of
Post Office Limited Board meetings.
Input Sought
The Board is requested to note the future meeting dates.
The Report
2018/2019
Date Time Notes
Tuesday 25 September 2018 11.45 - 16.30
Tuesday 30 October 2018 11.45 - 16.30
Tuesday 27 November 2018 11.45 - 16.30
Tuesday 29 January 2019 11.45 - 16.30
Tuesday 26 March 2019 11.45 - 16.30
Tuesday 25 June 2019 13.00 - 18.00 Away Day
Wednesday 26 June 2019 08.30 - 16.00 Away Day
Tuesday 30 July 2019 11.45 - 16.30
Tuesday 24 September 2019 11.45 - 16.30
Tuesday 29 October 2019 11.45 - 16.30
Tuesday 26 November 2019 11.45 - 16.30
Board July 2018
UKGI00043683
UKGI00043683
Draft Board Agenda for meeting on 25‘ September 2018
Minutes of previous Board and Committee meetings 5 Board action from Jane MacLeod Jane MacLeod For noting
including Status Report previous meeting
CEO Report 20 Standing item CEO Paula Vennells, CEO For Noting
Financial Performance Report 20 Standing item CFOO Al Cameron, CFOO For Noting
Postmaster Litigation 10 Jane MacLeod Jane MacLeod For Noting
Retail Strategy Update 30 Periodic action from Debbie Smith Debbie Smith .
For Noting
forward planner
Belfast Exit Business Case 30 Reserved decision Rob Houghton Rob Houghton Decision
ATM and Cash Strategy 30 Strategic Update Debbie Smith Martin Kearsley Decision
RELEVANT
Health & Safety
Standing item
Al Cameron
For Noting