Examination of Witnesses (Questions 20-39)
MR ALAN
COOK CBE, MS
PAULA VENNELLS
AND MR
HOWARD WEBBER
10 JUNE 2008
Q20 Mr Binley: That is not like the
factor of taking 30,000 people, Mr Cook?
Mr Cook: I am just giving an example.
I am saying if you have a situation where one postmaster wants
to go and the other does not, then it makes sense to take postmaster
preferences into account, but the primary driver of this programme
is to make sure that we end up with an evenly spread network serving
the community. Having said that, the vast majority of sub-postmasters
that are going are reasonably content to go.
Mr Binley: I am doubtful but carry on.
Q21 Chairman: We have pushed the
question about the future level as far as we can because from
2011 you are giving us a clearer commitment in that last response
of 11,500, which is encouraging. Would you like to say something
as half of your opening statement about the future, which may
helpfully introduce something else we want to ask you about. Is
that right?
Mr Cook: Yes. I was going to give
you a quick status update on the Network Change Programme. That
is all.
Q22 Chairman: Let me ask something
else first before you do that. Let me ask some background questions
of a more philosophical nature, as it were. We had a concern,
and the relationship between Royal Mail and Post Office Ltd is
clearly a feature of the independent review that is currently
being conducted. I would like you both to answer this question,
both the Post Office Ltd and Postwatch. Can you explain to us
what impact changes in mail services would have on Post Office
Ltd?
Mr Cook: What sort of changes?
Q23 Chairman: What kind of impact
would potential changes in the arrangements for our mail services,
the ownership and structure, have on Post Office Ltd?
Mr Cook: To explain the current
situation, to be clear, the Royal Mail Group is the parent company
and then there are Royal Mail Letters and Post Office Ltd. I act
as Managing Director of Post Office Ltd and I sit on the board
of Royal Mail Group. We are quite closely integrated today. Having
said that, there is a need for us to provide transparency in terms
of the financial relationship, so we have what we call an inter-business
agreement that exists between Royal Mail Letters and Post Office
Ltd which defines how much is paid by Royal Mail Letters to Post
Office Ltd for the services we provide. That has been in place
for many a year. Since I have joined, we have been through it
in quite some detail and gone through a process of much more aligning,
if you like, Royal Mail's aspirations for Post Office and their
customers in terms of how much they would pay us for a given transaction
and, in turn, how much we would then pay a sub-postmaster. There
is a much clearer line of sight now: if Royal Mail Letters want
to do this, they pay us for it and that is reflected in the payment
they make to us and the payment we then make on to sub-postmasters.
The motivation of sub-postmasters is now much more in line with
Royal Mail's motivation, if you see what I mean, but it is all
done on a pretty commercial basis. The issue will be: is the total
amount of the payment correct? That is quite difficult to benchmark
because there is not another market in the UK that one can benchmark
against. As things currently stand, given the profitability of
Post Office Ltd, the payment that Royal Mail makes to us is not
sufficient for me to make a profit on it. The way I am tackling
that is to make the business more efficient by taking out cost
and generally improving efficiency until such time as we can make
a profit out of that business.
Q24 Chairman: The independent review
is talking about potentially quite radical changes to the arrangements
for mail and sorting services.
Mr Cook: Yes. I probably did not
complete the answer to your question.
Q25 Chairman: It was very helpful
but it did not answer the question.
Mr Cook: The reason I was saying
that, and I probably lost my way, was that we already have a fair
degree of independence within the group, because I think that
is healthy to make sure that the right financial relationship
exists. On that basis, there seems little benefit in, for example,
taking Post Office Ltd out of the group. You could replicate those
arrangements from outside the group relatively easily, but at
the moment, as things stand, there does not seem any point from
our perspective in doing that.
Mr Webber: Picking up on Alan's
last point, we would agree that the benefits which are suggested
for demerger of Post Office Ltd from the Royal Mail Group can
be gained in other ways, very clearly. The ability of post offices
to take the goods and services of other postal operators could
be achieved very easily without that. Then there are dangers of
demerger—that Royal Mail might reduce the range of services
it does provide through post office outlets, and certainly reduce
the number of post office outlets that it would put those services
through. We certainly feel the case has yet to be made. We are
not quite sure what the evil is that demerger would answer.
Q26 Chairman: I was interested by
what you just told me, Mr Cook. I will flag it up Mr Binley for
the question he is going to ask later about finding some more
detail. I want to make sure that you did actually say that the
payment that you receive from Royal Mail is not sufficient to
meet the cost of the services you are asked to provide for that
arrangement?
Mr Cook: Yes. The business is
losing a lot of money today. That is the problem we are trying
to fix effectively.
Q27 Chairman: Is there an issue here
about the Royal Mail Group shoving costs on to the Post Office
Ltd subsidiary which is being funded by taxpayer subsidy?
Mr Cook: I think I can make Post
Office Ltd profitable from the money that is paid to us by Royal
Mail. I do not think the problem is that Royal Mail do not pay
enough; I think the problem is that it costs too much to run Post
Office Ltd.
Q28 Chairman: Your cost base is too
high?
Mr Cook: Yes. I have to say that
that is a very subjective view because it is not easily benchmarked.
Q29 Chairman: We will talk about
finances in a bit more detail. Let me ask another philosophical
question about the Post Office network and universal service obligation.
This is probably to Mr Webber initially. To what extent does the
Post Office network underpin the universal service obligation?
Mr Webber: Legally to a limited
extent because the actual requirements of the universal service
in terms of post office outlets are limited. They are a lot more
limited than even the 7,500 outlets which the Government's access
criteria would lay down. Meeting the Postcomm requirement, meeting
the licence requirement, is very easy for Post Office Ltd. The
Government access criteria are slightly harder to meet but not
hard enough and the 11,500 figure is, as we know, a lot higher
again. There is a floor below which services may not fall. I think
at the moment the USO element is not that significant.
Q30 Chairman: It is the access criteria
and defining the importance of the network for political purposes?
Mr Webber: Absolutely, and much
more so than the requirements laid down by Postcomm.
Q31 Chairman: Mr Cook, do you agree
with that answer?
Mr Cook: Yes, absolutely; our
commitment to the 11,500 plus the 500 makes that not a relevant
concern to us.
Q32 Mr Binley: I think one of the
problems during this whole closure process has been that people
did not understand the information regarding financial matters
that you gave them, and particularly gave to individual post offices,
quite frankly. It suggested that the Post Office totally was not
very clear about its financial arrangements or where it stood
in terms of cost and that relationship to profit. Could the whole
relationship between Royal Mail Group and the Post Office be more
transparent in that respect and could you do more work to ensure
that that transparency had meaning for people who work at the
coalface in your business?
Mr Cook: The first thing I would
say is that although we have a strong social purpose in the business,
we are a commercial business and we have to fight for the business
that we get. We have put in a very comprehensive tender, to use
the Card Account example again, for the Card Account. We are facing
active competition for that business. All the time, I am worried
that if I reveal too much information, I weaken my hand in competing
for business. Just to make that point, the first point would be
that I do need to make sure that I can compete effectively and
commercially. Having said that, in the context of this inter-business
agreement that exists between Royal Mail and Post Office Ltd,
Postcomm has been given that inter-business agreement and so the
transparency is there. They are looking at that, as are we, to
see if there is some way we could benchmark the fairness of the
total sum. It is quite difficult to do. Postcomm have asked for
a lot of information for example about other contracts we have
with other organisations, like insurance companies and banks and
whatever. It is quite difficult to draw any meaningful conclusion
from that because they are in different market-places. I think
we can look across Europe and try and draw some lessons there
but it is quite a complicated piece of work to reach a fair conclusion
on what the base level is, other than the custom and practice
that existed. In terms of the front line, that is the work that
I alluded to in part of my opening statement that said that it
was undoubtedly a few years ago a bit of a black art. Postmasters
were paid what postmasters were paid for different transactions
and they might be paid more for something that was not a tremendously
profitable activity for Royal Mail and vice versa, and
so on. It would be quite customary for a manufacturer to pay its
distributor amounts of money for different types of transactions
in proportion to how valuable that transaction was for them, to
encourage the distributor to put a lot of effort behind selling
such and such a product. That is the process we have been through
over the last 18 months; that is the new inter-business agreement
that is in place. It still produces a payment in total from Royal
Mail to Post Office Ltd that is much similar in total amount than
it did before but the way it is made up is radically different.
We did a pay deal 13 months ago with the National Federation of
Sub-Postmasters which realigned agent pay on Royal Mail's products
to be in line with that inter-business agreement. I now think
we have much stronger alignment right down the chain from Royal
Mail through Post Office Ltd to sub-postmasters in terms of making
sure that they are correctly paid in relative terms for the different
products.
Q33 Mr Binley: You will know that
many sub-postmasters during the negotiations felt that your figures
in terms of support costs from the centre were crude to the point
of being almost meaningless in terms of an impact upon the viability
of an individual office. You will have had that feedback, I am
sure, because I certainly did. That is the area of real concern
because you are making judgments about people's livelihoods. I
met one young man whose business came to an end shortly after
he ceased to be a sub-office; he could not sustain his business
and yet the figures you gave him had no meaning to him. Do you
understand the difficulties that creates at the coalface?
Mr Cook: Absolutely, and I am
sorry but I was only talking about the Royal Mail's—
Q34 Mr Binley: I know you were but
I want to take you back to where it really matters.
Mr Cook: If we then go on to the
bigger picture, which is the overheads, I think I have already
conceded that the overheads are too great in the business. In
fact, the last time we met I talked about the aspiration to take
£270 million worth of cost out of the cost base. The Network
Change Programme only contributes £45 million of that £270
million. I only make that point to illustrate the scale of the
change that needs to be taken elsewhere. The plan that I submitted
to Government at the outset of this five-year period from 2006
to 2011 makes the assumption that we can deliver all that cost
saving. Therefore, the number of closures we chose is in the light
of the fact that I need to deliver the rest of that saving. I
do understand the scale of the challenge. We are working on all
those costs and they will come out.
Q35 Mr Binley: I understand that
but at the local level a man's business has gone to the wall on
the basis of figures which he reckons had no meaning to him in
terms of running his business. Either you have a problem of communication
or you have a problem of not really knowing what the figures were
in relation to an individual post office. Either situation is
unacceptable, quite frankly.
Mr Cook: Certainly the latter
is not the case in the sense that we have a strong understanding
of what all these overhead costs are and how they are branched—the
extent to which the sub-postmaster accepts what that money is
spent on, understands for example how much it costs to deliver
cash to his post office, understands how expensive it is to keep
cash in the till and what steps we can take to optimise the amount
of cash that is left in the till overnight, understands the cost
of the IT, which is too high, without a doubt. We are redeveloping
the IT with a view to reducing its cost. We have supplied breakdowns.
If individual sub-postmasters have not understood that well enough,
that is a disappointment to me, without a doubt.
Q36 Mr Binley: They certainly have
and let me pass that on to you for future negotiations. You have
a lot of work to do there. Can I move on to a letter we received
from John Hemming MP, who is one of our colleagues in the House,
who is very concerned about this relationship between your problems
at the macro level and how it impacts upon micro level in terms
of fixed costs. He maintains that it appears that they wrongly
allocated at least some of your central fixed costs on a per office
basis rather than on an ad valorem basis. The fact is that
if they reduce the number of offices, the central fixed cost frequently
will remain much the same. There is a problem there, is there
not?
Mr Cook: This is something I have
spent a fair amount of my career doing.
Q37 Mr Binley: We are both businessmen.
Mr Cook: There are not really
too many fixed costs. Lots of people will protest that costs are
fixed but the name of the business here has got to be to try and
make as much of the cost base that Post Office Ltd has as variable
as possible. That can be achieved for example in some of the central
functions by outsourcing. You would then buy a service and therefore
if you buy less service, you just pay less because you pay per
unit and you are not saddled with the cost of the building and
so on. There are many techniques to try and make the cost more
variable, but the trick has to be that I cannot accept a protestation
that a piece of cost is fixed and therefore cannot be touched
because we have to come up with a fundamentally—
Q38 Mr Binley: I did not say that.
Mr Cook: I am not saying you said
that either. I am just saying that the challenge for me is really
to tackle the costs in as rigorous a way as possible, and that
is something I have had experience of doing. It is part of the
reason that I would like to think that I got the job, but it is
not easy and it is not going to happen overnight because some
of these changes are quite material, but I am working on the assumption
that they are all implemented within the timescale of this five-year
plan through to 2011.
Q39 Mr Binley: My final question
before we leave that: certainly there is a job still to do for
people who come up against this over the coming months. There
is a job to do and you need to work hard at it.
Mr Cook: Yes, in a communication
sense. I understand that.
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