Select Committee on Trade and Industry Minutes of Evidence

Examination of Witnesses (Questions 1-19)




  1. Good morning, Mr Roberts, Mr Leighton. We realise that some of you have been here before. I am not sure whether Mr Leighton or Mr Roberts will do the introductions, but I gather, Mr Leighton, you are the newest member of the team.

  (Mr Leighton) Yes, the new boy. I am the new Non Executive Chairman; on my left is John Roberts, who is the Chief Executive; on my right is Marisa Cassoni, who is the Group Finance Director, and to John's left is Stuart Sweetman, who is the Group Managing Director for Strategy and Business Development.

  2. Before we go into the formal questioning, I have noticed in correspondence with your organisation that you have been appearing individually and collectively before several bodies and hearings. I understand that that has been the subject of some frustration, and there are certainly lines which should be drawn as to who should be asking what and where and when. If I could offer this advice to you, if you feel that a disproportionate amount of time and resources is being devoted to answering questions to House of Commons committees whose relevance you have some concerns about, then perhaps you should write to the Chairman of the Liaison Committee, and the matter could be explored. I have tentatively made the point already because we are rather jealous of our remit here, but it is something that you might want to look at. We realise that while you are a public enterprise, you are nonetheless engaged in a business activity that consumes rather a lot of your time. We are very grateful for the time you have taken to come here this morning. Starting with your financial position, one of the things that did concern us was that we were not clear as to the state of your books, not in the sense of profit and loss but more as to accuracy of information, and whether or not you are now in a position to say which areas of your operations are profitable and which are loss-making. Can you indicate the areas that you feel you are meeting not only your service targets but also your commercial targets, and those where there is still some Leighway to make up?
  (Mr Leighton) If I could give an overview of context, being new I will hand over to John and Marisa. There is a fundamental issue with this business, which is that its information systems are not what you would expect for a business of this size and scale; and, therefore, one of the continuous problems is trying to track down exactly—not overall numbers in terms of the bottom lines, but the profitability of the businesses, products and accounts that we deal with. I think that, having listened to a number of these discussions, there is a lot of confusion about the difference between contribution and profitability. Units clearly contribute towards the bottom line. It is not the bottom line. Often, there is a lot of confusion between all of these things. A sizeable sum of money has been invested over the last 12 months, and Marisa and John have started to try to put the finance systems into some sort of shape in order to literally hoover up the information from the other divisions and put the profit and loss accounts for the individual businesses into some sort of order. I do not think we are at all helped in our situation, or that we help ourselves in a number of instances, because some of the data moves around. Marisa is doing a big piece of work now specifically to look at the profit and loss performance of individual businesses and how it fits in with the USO. People talk about whether it is or is not a profitable business; it is actually quite difficult to ascertain at the moment. One of the big drivers of the business at the moment is to try to get more information and less data. We have got complete data overload, and we are not particularly good at reaching the information—because there is a big difference. Marisa, in her new role, is specifically trying to get hold of that.
  (Ms Cassoni) When we look at profitability of the businesses, we exclude the income the business is getting on surpluses, which is still in the books of Consignia plc. We have a couple of £billion past surpluses sitting on our books and we earn interest on them. That, in the past, had been about £ten0 million, which is in our overall results. If we strip that out, because that has nothing to do with the operation of the business, and take into account that we also enjoy a pension holiday worth about £140 million, which we have also enjoyed over the past decade; and the benefit from the way we can account from our pensions, which is in total another £160 million, you can see that overall result and look under that at the operations of the business. The parcels business has been loss-making throughout the past decade, and continues to make losses. That is why we made the decision last year to restructure that business and exit from the loss-making part of that business; it has been losing money continuously over the last 10 years. Post Office Limited is the network of post offices, and over the last decade that business generated profits of the order of £20 million before the adjustments I am talking about. Once the Horizon project came into operation at the back end of the decade, it moved into loss. Its losses this year before one-off adjustments on its operating losses were £130 million, and last year, about £70 or £80 million. The reason it has increased is that we have rolled out Horizon and we have taken the full burden of the operating costs. The mails business was profitable throughout the last decade. It started at about £180 million at the beginning of the decade, peaked in about mid 1977 to 1978 at about £400 to £450 million and then has come off that. It has had no substantial price increases but its costs have continued to grow with inflation and the bulk of its costs have increased. It was about £170 million at the end of the decade, and it moved into loss the first year of the decade, losing about £80 million; and its current losses are about £100 million.
  (Mr Leighton) That is the way we are trying to think about these businesses now: the parcels business, the mails business and the network.

  3. What were the losses on the parcels business?
  (Ms Cassoni) The losses in the parcels business, if we strip out the special delivery product, which earns about £60 million, are about £200 million currently. There has been some change in how we define that business over the years, but they were losing about £50 to £60 million throughout the 1990s.

  4. Per annum or cumulatively?
  (Ms Cassoni) Per annum.

  5. So they have lost £600 million plus since 1990.
  (Ms Cassoni) Yes.

  6. How much is it in other areas?
  (Ms Cassoni) It started off the decade losing £140 million and ended the decade losing about £50 million. It depends what was in that business that changed over that period of time. The current position is that the parcels business, which also administers the special delivery product with the infrastructure that the mails business has used, is basically £200 million. If you strip that out, its losses this year, without profit from that business, which is moving across to mails business, is about £200 million.

  7. Special deliveries, bringing in £200 million.
  (Ms Cassoni) Yes, £60 million profit and £200 million revenue.

Sir Robert Smith

  8. I wanted to clarify when you thought you had reached a point when you had an information system that you had been happy with and that was robust enough for the size of the operation.
  (Mr Leighton) We are probably 12 months away from that.

  9. Will you be thinking of breaking down mails into its sub-businesses?
  (Mr Leighton) Yes. It is a special business. All of these businesses are entities on their own but there are a number of other businesses underneath that. These are margin businesses. The way I look at the mails business is that our margin on mail is about 2 per cent. Deutsche last week were saying they were very concerned, saying theirs had come down to 14. The Dutch are at 19. We are miles off.

  10. You are eventually breaking it down into delivery network, sorting network—
  (Mr Leighton) Yes, absolutely, by-products, yes.


  11. Mr Roberts, you have been coming to this Committee as long as I have been Chairman, and you have been telling us figures over the years. You are in the position now of saying that an awful lot of those figures—with the best of intent—were of dubious accuracy.
  (Mr Roberts) No, I do not think that is right.

  12. Or is it just that a different mode of analysis has then been adopted?
  (Mr Roberts) It is the degree of detail, Mr Chairman. If you remember, we have been separate from a government department now for thirty years, and during the whole of that period we have had independent accountants and independent accounts. When you look at the bottom line numbers that Marisa has talked about, there is no dubiety about those whatsoever. Where we are now finding it is much more difficult is with regulation, so you need, as Allan has just said, to have much more information about the product profitability and you need to break it down into individual areas. A lot of this has been done over the years by sampling, and it has been done to a standard that the external auditors have been quite happy to sign off. It is a degree of detail within those overall numbers. It is the degree of detail you need as a commercial operation as opposed to an operation as part of government, quite frankly.

  13. In the years when you were moving towards plc status, would it not have been prudent to have started to do that earlier, rather than after the event?
  (Mr Roberts) It has cost about £100 million to put in a new SAP-based finance system. One of the things we have discussed here before is the extent to which we have been able to invest or there has been a lack of investment. One of the things that we have done, particularly in the period when our costs went up, is to make those kinds of investments. I agree with you that it would have been better to do that earlier, but I do not think the money was around. What we were doing was working off a number of different finance systems in the four major parts of the organisation. We have now brought those together into one common pattern, and that should be finished within this year, as the Chairman said. I would not want you to think that the numbers you had in the past were of dubious accuracy because they were not; but we now need to break down those numbers to a much greater degree of detail than we ever did before.

  14. All I can say is that the experience of government is that they have not been that mean towards you. You have backed some dubious horses in recent years, with government support. In retrospect, would it not have been more sensible to have had more accurate, better focussed, financial information, in order to form a better judgment and, ultimately, achieve better performance?
  (Mr Roberts) I think, Chairman, with hindsight the answer to that has got to be "yes".

  15. It is not a question of hindsight, surely? This is a rule of business, that the quality of a decision is largely dependent upon the quality of information.
  (Mr Roberts) We were not running a business at that stage; we were being asked to operate much more as a public service, which is a debate that we had a little while ago. I think that the information that we thought we had at the time was perfectly adequate for what we thought we were doing. What has become clear over the last 18 months or two years is that the information we need to satisfy the regulator and to understand how we can compete in some of these areas, needs to be more detailed. I would suggest that any of the utilities before they were privatised would have been in exactly the same position that we were before we came into the new situation of becoming a company.

  16. I have had discussions like this with BNFL over the last three or four years, and they wakened up to it a wee bit earlier than you. It seems that in the old days it was a big envelope and cross-subsidy, and you were all right, providing the figures just about met the targets at the end of the day. Now, there are smaller envelopes and more decisions. Would that be a rough-and-ready summing-up of the situation?
  (Mr Roberts) It is also to do with the structure and the government structure within which we were then working. From my own experience, there is a quite different approach to financing now, in terms of both the regulatory regime and the introduction of competition, from the old statutory monopoly that was government-owned and everything else. It just changes, as I hope everybody expected it to.

  17. We have a record of your comments, Mr Roberts, to the Public Accounts Committee about the Post Office being overstaffed, although the last time you came before us, you made quite alarming proposals to reduce or change that situation. We do get information to that effect. It was reported in The Telegraph on 26 March that 27,000 more staff had been taken on since 1996-97. Can you tell us how that relates to performance, or what was the purpose of it?
  (Mr Roberts) In any year, we will take on staff because the scale of the operation grows. Every new housing estate needs to have new postmen going to deliver to more doors, even if you are only delivering the same amount of mail. In any year there has been an increase in staff for that reason. In the same period, some of those would have come out of the acquisitions that were made, so we have just added numbers because we were adding new companies to the overall. In terms of efficiency, in the period of the last decade, the letter volumes per working hour have gone up by something like 40 per cent. If you look at some of the old targets, like real unit cost production, we took out about 12 per cent of real unit costs over that period. There are a number of things like that where we can show that we were becoming more efficient. One of the things we have said is that the speed of that has not been good enough for all sorts of reasons, and as a result of that and the financials that we have already talked about, we needed to try and tackle the costs in a different way, as we discussed in November. Of course, 70 per cent of all our costs relate to staff costs. That means, inevitably, that if you are going to reduce your costs you have to reduce the number of people, and you have to change the way you work and make it more productive. We have push and pull: we have growth because we have to serve wider areas, which mainly affects delivery postmen; on the other hand, we are trying to get more efficiency throughout the whole system, against the background of mail volumes that have been flattening off.

  Chairman: Can you send us a note about staffing needs because you are vulnerable to cheap shots, and it would be useful to get it on the record? Can you include some of the bullet points about performance improvement set alongside that? We are not here to knock you; we are here to get at the truth, and would be helped by that.

Linda Perham

  18. I should like to ask you about industrial relations. Postwatch has said some rather robust things about your industrial relations and are quoted as saying in The Telegraph, again on 26 March: "They are frankly appalling"; and in a document that we have from them they say: "Industrial relations and working practices have been described as archaic. The trust and respect between management and the labour force has almost disappeared, with a detrimental effect on financial performance and standard of service." There has also been unofficial action, which has certainly affected deliveries in my part of East London. The people I have seen from various lobbies and meetings in the last few weeks have also not been very pleased about the state of industrial relations and about what they are being told, particularly in view of the possible job losses. Is the situation likely to improve? What comments do you have?
  (Mr Roberts) First of all, you are describing a situation that would certainly have been right 12 months ago. At that time, we were losing an enormous number of days through unofficial strike action. As a result of that, we asked Lord Sawyer, along with two colleagues, to look into it. I think that it is probably Lord Sawyer's report that you quoted from. It certainly gave the same indication. Lord Sawyer has now written a six-month follow-up report, which I would be very happy to make available to the Committee. He highlighted, quoting from the report, the following: "A dramatic reduction in days lost due to unofficial industrial action; improvement in performance as a result of stable industrial relations; high-level commitment to partnership working; creation of partnership vision; the establishment of partnership boards and joint support team; the doubling of the number of leadership training courses." That is an indication from someone who is independent but still working with us, of the kind of change that we have seen in the last 12 months. In terms of days lost through industrial action, in the last couple of months they have been a couple of hundred man-days out of something like 4 million a month. That is still too many, but it is a vast change from the situation 12 months ago. I would say that it has got a lot better. A lot of hard work has gone in, with help from Lord Sawyer in chairing a number of these groups, and some real progress has been made. The performance statistics, give the quality of service of first-class mail in February—the last month's figures we have—as 91.6 per cent. It is still slightly short of the target, but a lot better than 12 months ago. Second-class mail was hitting its performance target. There has been a knock-on effect in terms of better industrial relations and performance.

  19. How are you handling the obvious problems with the workforce when you are putting forward the possibility of huge job losses?
  (Mr Roberts) We have done a lot of talking with the workforce about that. We have tried to explain why, against the background of financial difficulties, we have to make changes. We have been taking them through exactly what we have in mind, for the best part of six months, before it was announced. A lot of discussion has gone on about what we have to do, and we have made it clear that we want to continue those discussions and negotiations about the impact on people. We were able to make the announcement recently about Parcelforce and the transport review—and we are still talking to the unions—nobody has gone on strike. It has been a very responsible response to a very difficult situation. I think that, again, is an indication that things are a lot better than they were 12 months ago.
  (Mr Leighton) Without any doubt, we have made some progress but still have a long way to go. The morale in the organisation has been poor, as you can imagine. Most of that is to do with certainty, ie, there is a lot of uncertainty and people do not like that. The proposals need to be firmed up, and then individuals will know what that means to them, which is by far the most important thing. During the time I spent in the mail centres, that is what they said: "We know the business has got to change." Most of these people have been with us a long time. They understand all the issues, sometimes quicker than we do, and they know how to sort them out. They know that things have got to change, and they absolutely understand that. Their issue is always the same: "Just tell me what it is; tell me what it means to me and tell me when I will know what it means to me." The one thing we can do is try and put that certainty back. There will be a period of time while we sort out the pretty perilous state of the organisation. People are going to have to deal with some very difficult situations that they have not had to deal with before. The most important thing in that is to treat everybody with the respect that they deserve, and if you do that then I think you stand a chance. Our people and the unions clearly understand what is required; we have just got to manage it well.

  Chairman: Can you send us some information about the spread of ages in your workforce and the length of service? You have just made the point that a number of your staff have long service, but you also have phenomenal levels of turnover in some areas. I realise that that is not necessarily contradictory, but it would be useful for us to get the figures that would indicate the scale of the problem. Obviously, there are people who stay for very short periods of time and therefore inflate or enhance the churn speed, so if you could give us that information it would give us a handle on something that the Committee is not very clear about.

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