Select Committee on Public Accounts Minutes of Evidence


Examination of Witnesses (Questions 260 - 279)

MONDAY 25 MARCH 2002

MR JOHN ROBERTS CBE, MARISA CASSONI AND MR STUART SWEETMAN

  260. Forty?
  (Mr Sweetman) Forty per cent of revenue.

  261. Why did you tell MPs it was 50 per cent in a letter to us dated 6th March?
  (Mr Sweetman) I think we said that it is 50 per cent of volume.

  262. You implied it was half. You questioned Postcomm's figure of 30 per cent as though Postcomm were lying. Now you are telling it is not 50 per cent it is 40 per cent. Were you lying in this letter to MPs?
  (Mr Sweetman) No, no. Postcomm used a set of figures that we provided them for other purposes and they have taken that as representative of the whole population of postings. When they came out with their proposals we then started a complete review of what happens within Consignia and we have come out with these fresh figures. Just over half of our mail is covered by postings over 4,000, which I think the letter said.

  Mr Gibb: It implied the revenues and profits were as well. I am out of time.

Jon Trickett

  263. Thank you very much. Good afternoon. Can I just ask you some questions about basic information. I wonder how strong your information systems are. First of all, there are now private sector comparators elsewhere as we have just been discussing. What are the unit costs for items under 350 grams in your private sector comparators? What does that imply in terms of savings and job cuts?
  (Mr Roberts) We will not know the unit costs, the private sector companies would not let us see unit costs.
  (Ms Cassoni) It is price sensitive.
  (Mr Roberts) It is price sensitive information.

  264. You have not been able to find out at all what it costs to deliver an item of mail in Germany or Holland?
  (Ms Cassoni) No.

  265. The cost to the company? You have no idea.
  (Ms Cassoni) You can calculate the overall margins.

  266. Have you tried to get the information? Presumably the information is out there, it is a matter of just working through it?
  (Ms Cassoni) No. We have access to the information that is in the public domain on our competitors and through that information you cannot tell those unit costs.
  (Mr Roberts) That includes analysts' reports.

  267. You have not got a clue?
  (Ms Cassoni) No. We can tell you what the overall margins are but not individual margins.

  268. The relationship of overhead costs to direct costs in relation to these private sector comparators, how do you compare them?
  (Ms Cassoni) It depends how you define overhead costs. The answer would be we can only analyse the information that we see on our competitors against what they publish. It is their published information, what we get from analysts' reports. What we do observe in our competitors is they have a higher proportion of variable costs than we do. If the markets change they are more able to change their cost structure more quickly.

  269. What does that imply then? Whenever I have had to make economies, which I have had to from time to time in large and small organisations, my first objective has been to cut down senior management and other overheads, you seem to be cutting the bottom of the chain, do you not, the food chain, the manual workers and others? I just wonder really, given the fact that you have just described the ratio of overheads to direct costs, it seemed to me unfavourable in your organisation, favourable in the sense that your overheads and fixed costs are too high relative to elsewhere. How is it we are cutting manual and other staff rather than overheads and fixed costs?
  (Mr Roberts) We are doing both. We are intending to take about £30 million out of some of the headquarters' costs that we have got and that is probably about a thousand jobs in total, management jobs in the corporate centre, in the sales functions and other managerial functions as well as dealing with the things that we have just talked about.

  270. If you were to set yourself a target of achieving the same kind of ratios with your private sector comparators, how much does that imply you are taking out of overheads and fixed costs?
  (Ms Cassoni) When we calculated the cost reductions it was based on benchmarking our competitors so we are trying to achieve the same kind of ratios as they are.

  271. What does that imply in terms of savings on fixed costs and overheads?
  (Ms Cassoni) The £1.2 billion is the savings that we are targeting.

  272. I know but that is both overheads, fixed costs and variable costs, in other words labour.
  (Ms Cassoni) Then the overheads are costs that John has quoted.

  273. £30 million?
  (Mr Roberts) We are taking £30 million out.

  274. I know. The question I am asking you is if you are to achieve the same kind of ratios as your private sector comparators, how much will you be taking out of fixed costs and overheads? I have already heard what you have said, how much will you be taking out?
  (Mr Roberts) Fifteen per cent. The £1.2 billion is roughly equivalent to taking about 15 per cent out of our costs right across the board and that includes overheads.

  275. It is falling disproportionately on non overhead costs, it seems to me. If £30 million out of that is fixed and overhead costs, it follows that the rest of it is out of labour costs and other variable costs.
  (Mr Roberts) Seventy per cent of our costs are labour costs.

  276. I know.
  (Mr Roberts) So inevitably there will be a disproportionate impact in that cost saving.

  277. You have told the Committee already that the ratio of overheads and fixed costs to variable costs is inappropriately balanced relative to other private sector comparators, in other words you have too much in fixed and overhead costs. I am asking you a very simple question really, if you were to take out a comparable amount how much would that imply or do you not know?
  (Ms Cassoni) It is £100 million taken out of overheads.

  278. Can I ask you another question. I am trying to explore your management information systems because there is a general view that you are competent as senior management as you know but I have to say so far you are not making much progress in demonstrating otherwise in the answers you have given us so far. I am interested in the rural/urban split because this is at the core of the debate about the Universal Service Obligation. What is the differential unit costs between rural and urban services if you take, for example, the 350 gram limit as what is eventually going to be up for grabs?
  (Mr Sweetman) Do not know.[2]

  279. Why not? Why do you not know?
  (Mr Roberts) We just do not have it with us.



2   Ev, Appendix 2, p 51. Back


 
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