Examination of Witnesses (Questions 170-179)
POST OFFICE
LTD
5 FEBRUARY 2008
Q170 Chairman: Can I begin, as I always
do, by asking you to introduce yourselves?
Mr Cook: Alan Cook, Managing Director
of Post Office Ltd.
Ms Vennells: Paula Vennells, Network
Director.
Q171 Chairman: Thank you for your
written evidence and for coming before us. This is a slightly
frustrating process today because we are trying to do this expeditiously
because of the timetable in which you yourselves are pursuing
your closure programme, which means we will not be able to pursue
at length some of the issues we would have liked to have pursued.
We will have to produce the recommendations, if there are any,
very quickly so they can influence the process and not just be
some kind of footnote in history. We can influence the end of
the process if that is necessary. We are not intending to ask
you many questions on the franchising process and Crown offices.
I ought to give you a chance to respond, if you want to, either
now or at the end of this evidence session, to any of the comments
you have heard from the Communication Workers' Union about the
franchising process that you think particularly deserve note.
It is unlikely our earlier report produced anything significant
on the franchising process. There might be something later on.
Alternatively, you can put some thoughts in writing to us to respond
to what was said by the Union if you would find that helpful.
How would you like to take that forward, Mr Cook?
Mr Cook: I think probably perhaps
it would be best to leave the franchising to the end. You did
suggest that there would be an opportunity for me to say a few
opening remarks, which I would like to do, to set the context
for the network changing programme as a whole because I think
that is what we are here to talk about. I felt greatly motivated
to make some comments about some of the remarks that were made
by the Union, but let us focus initially on the prime reason for
the session. I have been with the Post Office now for two years
and we are nearing the end of the second year of our five-year
recovery plan. In recent years, prior to my joining, the losses
that POL had experienced started to escalate dramatically and
really government services have been increasingly withdrawn resulting
in reduced incomes at post offices, the TV licences business was
taken away, the driving road tax business went to the Internet
and the benefits business is being paid directly into bank accounts.
Government income has dropped by a little over £400 million
per annum since this process began, over the last three or four
years. We are expecting to see a further drop of £50 million-worth
of income next year in comparison to this year and that is even
while the card account is still with us, that is just as a result
of a further decline in the existing business. Nevertheless, Government,
not unreasonably, wants POL to act commercially and it wants it
to be profitable and that is what I was hired to bring about.
The one exception to their profitability point is the social network
payment where they have agreed to make a payment of £150
million per annum for the next five years, through to 2011, to
maintain the network size at around 11,500, as you heard in the
evidence you received last week. So internally we are now talking
about our aspiration of becoming a commercial business but with
a social purpose. We have to behave and act commercially, but
we have to recognise there is a strong social dimension to the
business and that is what the Government is putting its share
of the cash in to support. We have produced a five-year plan and
on the back of that plan the Government supplied the funding of
£1.7 billion, and I guess we will get into questions of what
that is comprised of during this session. With losses at the current
level and more to come it is clear that we need a dramatic turnaround.
In my background in business dramatic turnarounds are normally
achieved in one of two ways: they are either as a result of increasing
revenue, ie selling your way out of the problem, or they are as
a result of reducing costs and taking a tough line on managing
costs down. The unusual thing about this challenge is it needs
both. Typically you find the management team reflects the nature
of the challenge. So if it is a revenue challenge then you will
find it is a very entrepreneurial top team. If it is a cost reduction
challenge it will be a hard-nosed, tough-minded team. Here we
have to do both and that is a significant challenge. I have experienced
both in my career but I have not experienced them both at the
same time and that is the challenge, how do we get the mix between
becoming entrepreneurial, commercially focused and aiming for
profitability whilst still accepting that the cost base that this
business generates is far too great?
Q172 Chairman: This is quite a long
statement, Mr Cook, and it is not really germane to what we are
discussing today.
Mr Cook: It is incredibly germane.
Q173 Chairman: We are talking about
the closure process today, not the future of the post office network.
I would like you to draw your remarks to a conclusion, please.
Mr Cook: Let me just focus on
the cost portion. The revenue is important and that is why sales
are important, but we are seeking to take out £270 million
of costs over the five years, that is about 25% of the total income.
We know where £220 million of that cost saving is going to
come from and £45 million of that £220 million is coming
from this closure programme. That £45 million comes from
the Government's decision that we should close 2,500 post offices.
Inevitably the programme has attracted a lot of publicity. We
are here today to demonstrate our personal commitment and the
business's commitment to finding a way of implementing these changes
in a sensitive, caring and collaborative way. I think you received
evidence last week to that effect. No doubt you will have your
own questions to help determine and form your own opinions.
Q174 Chairman: That is helpful. We
do understand you are trying to build new business in the Post
Office and we have a lot of respect for what you are doing. That
is not something for today's session. We understand that you have
a target of 2,500 offices to close. That has been set by the Government.
We will be asking the minister about that later. Can you put on
record what flexibility you have around this 2,500 number?
Mr Cook: 2,500 is not an end in
its own right. There certainly would not be more than 2,500 closures.
We have been asked to develop a network size and implement up
to 2,500 closures to produce a sustainable network of 11,500 branches
against a context of a £150 million social network payment.
That does not mean we have to shut exactly 2,500, but it would
need to be pretty close to it.
Q175 Chairman: What is the lowest
figure for closures that is sustainable in your commitment to
the Government?
Mr Cook: It depends on exactly
which post offices are closed and how much cost savings acheived.
We are trying to save £45 million out of this programme.
If we save less than £45 million we would have to make those
savings somewhere else. The number of closures is going to be
close to 2, 500. It will certainly not be less than 2,400.
Q176 Chairman: Thank you. We shall
go into profitability issues at some length later. Can you just
explain to me how closing individual offices impacts on your essential
costs because I am very worried that all the branches that remain
will be less profitable using the definition you are using? There
could be a further round of closures flowing on from the logic
that you are applying for this round of closures.
Mr Cook: The £45 million
saving from the closures really breaks down into two categories.
About £29million of that £45million comes from direct
Post Office costs, basically sub-postmaster pay, fixed pay and
the costs of running the branches themselves. There is a further
£16 million-worth of cost that we need to take out of the
Post Office infrastructure that supports those post offices. If
we do not take that £16 million out then your worry would
be true. Providing we take that £16million out then the unit
cost of running all the other branches would not go up. That £16
million really falls into two categories: £9 million of it
is relatively straightforward to get out because it is a direct
consequence of a post office closing. For example, if we take
out the computer terminal, they are not tapping away and we do
not have to maintain that terminal, so just by shutting the branch
we save money. There is another set of costs which is much harder
to get at and that could be, for example, the cash in transit
truck which turns up two or three times a week to deliver the
cash. You cannot just get rid of the truck because he is going
to visit the one down the road. It is much harder to get that
cost out. I believe we can get it out from a national perspective
and providing we do get that further £7 million out then
there will be no unit cost increase of a post office branch. So
this closure programme should not beget another one in its own
right.
Q177 Chairman: There has been a lot
of pressure from communities to club together and save a post
office. There have been discussions about access to information
and so on in that process. Has there been an example so far of
a community or a local council actually saving a post office in
this closure programme and, if so, does that saved post office
count against the 2,500 number or is that one in and one out somewhere
else?
Mr Cook: If a local authority
or an organisation is interested in saving a post office as you
put it, first of all, it would only be in the context of one that
we were closing. So if we say this post office is closing then
we may, and indeed had, an approach. We have not got to the end
of the cycle yet on any of those approaches. It seems feasible
that some of those post offices may well be separately funded.
Q178 Chairman: Is there any risk
that at the end of this process there will be too many post offices
left open to meet the criteria?
Mr Cook: Too many?
Q179 Chairman: And having to revisit
the whole thing all over again?
Mr Cook: No.
| 
