Examination of Witnesses (Questions 40-59)|
CBE, MS MARISA
TUESDAY 16 APRIL 2002
40. At the moment, I suspect that there is no
rationale to it at all, but it has been suggested that the take-up
of junk mail by consumers is greater on a Saturday because they
do not go to work by and large, and that the people who like to
have things delivered on a Saturday get a higher take-up of the
potential selling. Therefore it could be suggested in marketing
terms that it would be better to deliver only junk mail on a Saturday,
when people have the time to read the stuff and throw it away
slowly rather than quickly, and fewer of them throw it away. Has
this ever crossed your desk as an issue before? Some people think
that this is of some commercial value.
(Mr Leighton) The only issue is that you should remember
this is a logistics business and the whole P&L is driven by
its ability to handle items efficiently. That is the big driver.
Clearly, therefore, two things need to happen: firstly, we need
to run it in the most efficient way we can, and to a degree you
need an even spread of distribution, almost day-by-day, because
that drives your fixed asset base much better than the other way
round; secondly, cost has to come out, without any doubt at all,
but it cannot be at the detriment of service. In the end, we have
to improve our service levels as we take our costs out. That is
what great businesses do. It is very easy to do one or the other;
the trick is to be able to do both. In anything to do with service,
our plan is to try and make that better. However, at the same
time there is the point of the second deliveries, which is a very
important point for everybody to grasp. The key number is 4 per
cent of the revenue and 30 per cent of the cost. It is nuts. Therefore,
we are looking to drive efficiency in the areas where we do not
undermine the service of the USO. Also, remember that USO is ten
per cent of the volume and 90 per cent is non-USO.
41. It is very important; I understand that
cost is everything and it is about reducing those costs. Can we
ensure that in some areas where it is more costly, you will not
look to reduce the service there because those areas cost more
than other areas? That will be important. The other thing is that
you are doing away with the second post: are you aware that there
have been a lot of concerns expressed by small businesses. Are
you working with small businesses to overcome their problems and
issues, to ensure that they will continue in business as well?
(Mr Roberts) Yes, we are working very closely with
the Federation of Small Businesses, Mr Hoyle. The idea of the
pilots, once they start, is to try and flush out the kind of problems
that you are talking about. We are not just saying it is going
to happen; we really do want to try and understandalthough
I had a debate about it in a different committee room, where somebody
said to me that everybody will be bankrupt because their mail
will be an hour later. I think we have to work at these issues.
I know it is important for people working from home.
Sir Robert Smith
42. Mr Leighton is rightly talking about the
big picture. At the moment, you are a universal public service
organisation, but in a few years' time, having been exposed to
competition, or in 12 months' time, with more information about
your operation, how will you restrain yourselves from reducing,
where it does not matter, to the bottom line, to the bare minimum
of the licence?
(Mr Leighton) There are two observations. Part of
our issue is that we have had an identity crisis: we do not know
what we are; we do not know whether we are a business, a public
service, or whatever. That is why often we end up where we are.
Primarily, this is a business that provides a public service.
The fact that it provides a public service should help the business
and should also help the business provide the public service;
so the two things are very connected. Therefore, everything we
do has to have the public service piece in the back of our mind.
It should be a major piece of competitive edge rather than a weight
around our neck, which is often how it comes across, and is largely
the way we should do it. At the same time, we have to get after
the other aspects of the business and drive profitability up.
My answer is that if you think of this business as three separate
businesses, Royal Mail, Parcelforce and the network, if we think
of those in some detail then it is possible to connect the public
43. A long time ago, obviously, telecoms went
down the route of competition, and there you have got a service.
A constituent of mine lives in a rural area trying to run a tourist/farming
business, and when he cannot get his modem to connect to the Internet
without hanging up, he is told by BT that under the Universal
Service Obligation, they are not required to because the Universal
Service Obligation is for voice telephony, and that it is basically
data. My worry is that in ten years' time you will be coming here
and saying, "to make our operation efficient and to deal
with the competition, with all the information we have now to
expose our costs and operation, we should not be going beyond
the licence in those areas where we are not facing competition
because, obviously, that is dead money in commercial terms".
(Mr Leighton) You heard from John that our intention
is that within the letter of the USO that is what we intend to
do. Let me tell you, it is much more embarrassing to come here
and tell you we are losing £1 million a day, and it is much
more embarrassing to say that we have already had to talk about
12,000 or 13,000 people being made redundant. It is a pretty difficult
thing to do. We cannot get away from the factand it is
the one thing I can stress to you; this business cannot continue
to go on as it is. It is heading in one direction and it needs
major surgery. What we are describing is the way in which we intend
to do that. Over the next two or three years the first thing we
intend to do is get ourselves back to the situation of some profitability,
with people who have certainty in the business and do not feel
completely demoralised. We can generate some cash and improve
our service at the same time. That is where we have got to be.
That will take us two to three years. When we get to that stage,
we will talk again about what we are going to do next, but at
the moment we have to be very focused on making sure that the
thing exists at all. That is the issue.
44. Taking you back to the figures you quoted
on the second delivery, they sound very dramatic: 4 per cent of
the volume, 30 per cent of the costs. Have you a figure for the
impact on the bottom line if you abandon the second delivery but
retain an am single delivery? What would that single measure do
to the bottom line?
(Mr Roberts) It will be some hundreds of millions
of pounds, we believe. The pilots that we are doing now are to
try and pin that down, because it would depend entirely on how
we delivered, how we did business, and what we did with small
businesses, as Mr Hoyle said. Certainly, the overall effect could
be some several hundred million pounds, if we did it.
45. Would you recognise that probably the bigger
issue for business is the time of the single delivery rather than
the second delivery?
(Mr Roberts) Yes.
46. Is it the case that the saving can be extracted
from abandoning the second delivery without having to spread the
single delivery throughout the day?
(Mr Roberts) We think it can be done if you spread
the single delivery throughout the morning in urban areas, and
also that you give businesses an earlier delivery. Businesses
would get delivery roughly at the same time as now, but we would
spread residential deliveries across the morning. We would be
making a distinction between business and residential. We believe
that can be done, but, again, we are back to the pilots. We have
to test this out on the ground. We have to consult with Postwatch
and Postcomm to make sure that they understand exactly what we
are doing, and that is the whole point of doing the pilots.
47. You are doing the pilot schemes now, are
you, or are you going to start them?
(Mr Roberts) We are in what we hope is the last stage
of discussion with the union, which has been basically supportive
of the concept. As ever, the devil is in the detail, so we are
talking about detail. As soon we get those talks out of the way,
the intention would be for the pilots to start within the next
48. There is nothing to report on because they
have not started yet. I was just wondering, in view of what we
have just been talking about, whether it is worth doing it anyway.
Is it worth doing the pilots? It seems as though you are heading
down the road of doing this anyway, especially bearing in mind
the costs you mentioned.
(Mr Roberts) Our intention is certainly to do it if
possible. It is very important to make the kind of savings we
talked about. Also, we do think it is the most effective way to
do delivery. We wanted to do the pilots to understand in particular
the point Mr Hoyle was making about the series of routes, how
many businesses would we deliver up-front; how many small businesses
would be affected and how many home-workers. It is getting that
kind of data that is important, not to say whether we are going
to do italthough, obviously, there has to be a lot of discussion
with Postwatchbut to say how we can best do it to get through
some of the worries, and demonstrate that we can cope with the
vast majority of issues that people are currently worrying about.
It is not to say, "shall we, shall we not?"; it is to
say, "this is to test it, to show how it can be done and
to show what the results are". We need to do it because the
last big area in this country where we do things very differently
from most other developed countries, and I think less effectively,
is the second delivery.
49. Mr Hoyle talked about the Federation of
Small Businesses. Have you any idea about public opinion, without
doing the pilots? Is it opposed to losing the second delivery?
(Mr Roberts) I think it is very mixed. There are many
people who leave home early in the morning, before the morning
delivery is made, and, as a result, their perception of mail delivery
is that the mail is delivered in the evening effectively, but
it is notit is when they get it. There will be others who
desperately feel that to do this would be to go backwards because
they are used to getting mail at a particular time of the morning.
We have to try and balance between those two things. We will undoubtedly
upset some people who would very much like to have mail at nine
as opposed to eleven, but I think we are in a position now where
we have to try and make that balance between doing things that
are much more efficient for us, but at the same time providing
a service to people which, hopefully when they have got used to
it, will not mean a major deterioration of what they have had
over the years. There is an element about the Post Office that
I know to my cost: everybody has got used to it over the years,
and people in general do not like us to change things, and I can
understand why. There is this feeling of, "why do you need
to change it?" We need to change it because it costs an awful
lot of money to do it this way, and over the years second delivery
has gone from something like ten per cent or 15 per cent of mail,
down to about 4 per cent. It really is not worth doing it. If
you do not do that, then you need to spread it to make it as effective
as you can.
50. Finally, you mentioned business and residential
and delivery. I have a lot of small shopping parades in my area,
and I am not quite sure how this would work where there is a residential
area and then a stretch of businesses, where there are small pockets
as opposed to areas where you have a large amount of industry
(Mr Roberts) Without getting too technical, a postman
when he does his delivery round has an individual round to him
and one of the things we would have to do would be look at the
way in which we constructed all those rounds. What we have in
mind at the moment is maybe it is going to be volume which will
determine whether something is business or residential, in other
words the amount of mail they get on average, and you would have
to replan the way in which the postman does the delivery so that
maybe somebody does all businesses and somebody does all the residential,
and we have been testing that already so it is capable of being
done. I can separately or later explain how we might do it, but
it can be done is perhaps the easiest answer to your question
at the moment.
51. It would be helpful to know that.
(Mr Leighton) If you ask anybody, "You get this
today, we are going to take it away from you, do you like it?",
they will all say "No". There is a one hundred per cent
guarantee that everybody will say it is terrible. Is it less of
a service than people get today? Yes, it is, so let us be clear
about that. However, this is being done for economical reasons
and it is such a small part of the revenue that, on Mr Hammond's
point, for us the "what" is decided. The issue is the
"how", and how can we do that in a way that particularly
the small businesses caters for them in less of a dramatic way.
But we have to do this. Also, some of the reasons we are doing
this is to restore and repair the financial position of where
we are. Our intention is to invest some of that money back. This
is not just take the money and stick it on the bottom line, because
what has also happened to this organisation is it has been starved
of investment and, unless we start investing some of this money
soon, then we will be coming every year and having exactly the
same conversation in ten years' time, so we have to be pretty
brutal about this.
52. Can I ask you about the impact of competition
on rural services? Consultants to Postcomm indicated in their
findings that competition need not harm rural services because
the cost of providing a rural postal service is not significantly
dissimilar from the cost of providing an urban postal service.
Now, that is a highly counter-intuitive conclusion, and I wonder
whether you agree with that and, if you do not, what have they
(Ms Cassoni) As Allan said at the beginning, it depends
how you cut the costs and we are currently looking at that, but
if we analyse the cost of delivering a letter it depends on the
geographical mix. If you have a distribution whereby there is
quite a lot of urban and some rural, for example, it will cost
you about 26p to deliver a First Class letter. If you look at
where the mix is a lot of rural and very little urban, then it
can go as high as 44p/45p, so it depends on the geographical split
of the country. In certain areas it certainly costs us more to
deliver than we earn. In other areas where the mix is different,
we can cover the costs.
53. So you would disagree that there is no need
for competition to harm rural services?
(Ms Cassoni) I would suggest that basically it can
harm rural services because of the economics I have just described.
54. Can or will?
(Ms Cassoni) If it is introduced as proposed, it will.
(Mr Leighton) It depends on the impact but clearly
it must cost more money to go into outlying districts than to
closer districts. It is as simple as that.
55. Given that finding, have you commissioned
any work to counter those conclusions to demonstrate why they
are wrong, or how they are wrong?
(Ms Cassoni) We are working on the costings to try
and demonstrate that. As Allan said, unfortunately the costs of
the business were not structured in such a way to have that data
56. Is not a major determinant in costs the
number of hands that touch the letter, and that need not necessarily
be an issue in respect of rural or urban? You could have urban
mail that had to be handled by a lot of people just as much as
you could rural.
(Mr Roberts) I think it would, Chairman, you are quite
right, but the biggest difference of all is the delivery cost,
as you will know from your own constituency, between delivering
something which goes into Edinburgh for delivery in Edinburgh
or goes into one of our mail centres for delivery some way away,
particularly as most rural deliveries are made by a van as opposed
to a man or lady walking round the streets. That is where you
see the biggest differential. What Marisa was talking about is
the differential in delivery costs in particular, and that is
where you see the major difference, even after it has gone through
all your pairs of hands.
Sir Robert Smith
57. So the 26p and the 44p is the last stage
(Ms Cassoni) It is the total cost.
58. The total cost of posting to reaching the
(Ms Cassoni) Yes.
59. So on the 44p you would be seeing a loss,
and on the 26p a profit.
(Ms Cassoni) Yes.