A Quick Review on the Impact of Network Transformation

Post Office Ltd has still not published its 2015 Network report so this review is based on available data.  The opinions expressed are clearly my own.

In 2011 POL embarked on their Network Transformation Program.  The Government provide £1.34b spread over 4 years to achieve their stated target of reducing the annual subsidy POL would require from the Government while maintaining the network size at an approximate level of 11,500 branches.

I will leave an analysis of the failure of the NT program to meet any of its economic targets to a later date – suffice to note at this point that POL now require an additional £650m to try to complete the project.

In 2011 the network of 11,500 branches were split as follows:

872 Crown/Main Post Offices, 9969 subpostoffices and 979 outreach and satellite offices – Total 11,820

Some of these had already been converted to new models as part of the pilot project. (by Feb 2013 some 400 had been converted)

The target numbers for conversions set by POL and the Government for March 2015 started off as

4000 Main Post Offices, 2000 PO Locals, with the remainder staying as they are.  There was no indication in the original document of what would happen to the remainder.   Therefore one could conclude that after the £1,34b was spent and 6000 offices were converted that would be that.

By the end of the 2010/15 parliament POL had achieved the following:

2384 Main Branches converted and 1734 PO Locals = 4118 in Total and a long way short of their original target.

But a key point here is that over the course of the 4 years of the project these targets changed – downwards – the reason being that Subpostmasters did not want to change.   This can be best be seen by the fact that POL had to increase the original compensation package of 18 months remuneration to 26 months remuneration to entice more to convert.  Even then POL are still far short of meeting targets with only 5129 offices signed up to convert (that number includes those that have converted)

Meeting targets means getting Bonuses for POL management and Field Operatives – sources said that Field Staff were being paid up to £150 per contract signed which ultimately led to fairly dubious persuasion techniques on SPMRs.

Looking at the 4000 or so that did convert we need to take into consideration the following:

a) in the normal course of events during any financial year about 800 offices change ownership (churn).  It became compulsory for those offices being sold on to convert if suitable therefore a great percentage of the 4000 will have occurred by natural selection rather than choice

b) the remuneration package on offer for Mains is completely different to traditional contract offices and by changing the way these offices are paid would inevitably lead to some office being financially better off by converting.   I don’t know the number but it would be a significant proportion of the early convertees and I would hazard a guess at least 1000 (mains offices)

Of course this also created the problem that it cost POL more to run these – hardly helping the subsidy reduction target.

c) those that chose to leave the network of their own accord received compensation and FOI requests revealed that very few did early on in contrast to the belief that thousands would be rushing to exit.

Throughout the 4 years concern grew amongst SPMRs what would happen to the smaller traditional offices that were the Last Shop in the Village (LSIV) so to speak and who relied heavily on their post office income to support their shop.  This led to POL defining the LSIV as a PO Branch where no other retail outlet (including Pub, Petrol Station etc) was within 500m.

The interpretation of this requirement by Field Operatives of POL has led to some dubious and bizarre decisions (particularly in Scotland where I have been keeping an eye on them).   A major concern as well is that in order to meet targets and before the LSIV ruling was put in place many LSIVs were in fact assigned as Locals when they should now fall within the Community Branch group.   POL will not release the information required for this effect to be analysed.

The LSIV position is distressing for not only the SPMR but the community they serve.   There is no laid down set of rules regarding future ‘transitions’ – i.e. a new retail outlet opens within 500m – what happens if it closes after 3 months etc etc  This one size fits all approach is just so impractical it beggars belief that someone actually thought of it.

The desperation of POL to meet their targets during the last 3 years not only affected Locals and Community /LSIV offices they also impacted on those offices that chose or were originally offered to convert to a Mains Model.   The original target was 4000 Mains which was then reduced to 3000 leaving many offices that had been converted to a Mains now known as ‘Toy’ Mains and whose status will be changed to Local in due course.

New Targets

Moving forward now into the present – POL have renewed their ‘vigour’ to ensure that the targets they have been set for the next three years are met.   The 3000 Mains, 6000 Locals and 1500 Community Branches will be reached no matter what apparently.  Letters have been sent to all offices indicating their future and conversion is now compulsory.  Like it or not many branches are now being advertised as being available to local businesses to take on.

But surely the most appalling move by POL is that from next year existing branches will have their contracts changed unilaterally by POL to the PO Local structure which means a reduction in Post Office income of more than 50% for many.  This move is so obviously doomed to failure that it is not even worthwhile commenting further on it other than to say it is indicative of the ability of POL management to run the network.

The Reality

PO Branches are owned by the SPMRs that run them.  Therefore a sustainable network is only sustainable when there are enough buyers out there to purchase these premises when the become available through sickness, retirement or death.  In the past owning a Post Office meant having a fairly saleable asset.  This is no longer the situation.  There are currently about 850 offices that are desperate to leave the network but can find no buyers.   If there are no buyers now there are unlikely to be new buyers coming along in the light of falling PO income.  These 850 offices can only wither on the vine unless they receive some direct intervention and recognition of the problems they face.

The Economic Effect

The prime requirement of the NT project is to reduce the level of annual subsidy required by POL to run the network.   There was never any question that a residual subsidy would be required to maintain the network at its current size and there has never been a question that the vast proportion of the 11,500 offices (POL say 8000 of them) were loss making for POL.   The payment structure of PO Locals and Mains being what it is and based solely on transactions processed should ensure that no future subsidy is required to support them.  Therefore one would conclude that the residual subsidy required would be to maintain and support the 1500 LSIV community branches.  At a suggested £60m per annum then (£40k per office) you would think that would suffice.

But no – POL suffer from declining sales in all but financial products – the very products that Locals and Community branches cannot sell.   Community offices will continue to see their PO income decline as a result although to be fair not as much as Locals as they will continue to receive a fixed element to their pay.

POL will argue of course that the subsidy is not allocated to individual offices but rather through a very vague cost structure surrounding the provision of SGEIs.

Rural economies therefore will continue to suffer even after the implementation of NT takes effect.

The Urban Environment

I don’t know why the effect of NT on the High St has never been properly analysed.  Of course it is widely publicised that this is not a closure program – just moving offices to existing nearby shops.  Well the result of that is that yet another shop on the High St is being closed – this time by the Government – and the effect is not only felt by the shop that closes but the neighbouring shops that lose the footfall.   In the last closure program there was a detailed study of the effect of this in Manchester and the effect on the local economy was recognised as being significant.

Future Prospects

Much has been said recently about High St banks closing their branches and almost always the Post Office is vaunted as being able to fill the gap.  A few years ago I would have agreed wholeheartedly with this proposition but the fact is NT has ruined any chance of this being practical as more and more Bank branches close.   PO Locals are not geared for banking transactions – it doesn’t work at the retail counter and from a cash perspective they could never provide a consistent service (not enough cash for payouts).

The network has become unstable – shortly transitional pay agreements with those who converted early on will come to an end and many will no longer be viable and will close.  Who then will take up the PO Local?   I have a multitude of examples of small towns and villages already being left without a PO as a result of NT.  The earliest incidence of this happening was in a large village (pop:3000) in Oxfordshire in 2010 when only a Local was offered to replace a busy traditional branch.  That community since then has relied on a 4 hour a week service from a van.

And therein lies the rub.  Remove the PO from a community for any length of time and people get used to it not being there and make alternative arrangements.  Once it is gone its gone.   Satellite and Outreach services try to plug the gap but I have seen an increasing number of vacancies for Outreach services on the POL website over the last few years – not many SPMRs want to take them on and certainly not PO Locals.

NT has failed.   The concept of trying to maintain a network way beyond its optimal size while reducing the subsidy it required in the face of falling revenue was and remains totally absurd.   POL continue along this path unchecked and unmonitored with spending totally out of control.

The risks ahead are great  The reliance on the IBA with Royal Mail to provide an exclusive postal service will surely be under threat when the agreement nears expiry.  RMG is now totally independent from the Government and has to make the best commercial decisions it can for its shareholders which sadly are now fund managers who care about profit not tradition.

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3 thoughts on “A Quick Review on the Impact of Network Transformation

  1. My ex colleagues are providing comments on this via social media. I have now more to add which I should have thought of before.

    The rational for maintaining the network at its present size is mainly political. The government can’t be see to be closing Post Offices yet there is a commercial aspect to it as well. The size and reach of the network is a key selling point for attracting new clients to use the network to provide their services.

    The then Minister (Ed Davey) could never be drawn in to making a promise that additional Government work would come the network’s way but he, and his successors, all continued to suggest that would be a key growth area. Well it wasn’t. Government work plummeted over the course of the 4 years. From the withdrawal of Tax Discs which caught all of us by surprise to the NS&I decision to stop using the PO for their products which wasn’t such a surprise. In fact the NS&I decision was easily foreseeable just by looking at their annual report. Why POL management reacted with such surprise when the ended the relationship is beyond me. They couldn’t have done much more to alienate NS&I by bringing in competing products from Bank of Ireland.

    Going back to the commercial opportunities the network size brings – there is clearly competition in the bill payment market most notably from PayPOint. They have a wider spread than POL and in order to compete Ms Vennells vision incorporates the roll out of what are known as PO Basics, 25000 of them. No doubt Ms Vennells understands and appreciates the impact this will have on existing offices.

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  2. The only bit of this I would query is the cash availability.

    When “volunteering” (with a gun to the head) to go to a Local, we were given the option to provide our own cash (with higher transaction income) or maintain the current PO funding model which, having many benefit payouts to make, was the only sensible option.

    So with the right infrastructure still in place, we can mop up bank closure customers, and to be honest, if POL had a GOOD personal and business bank account, we could gain them significant business.

    From the outset, this has been an exercise in breathtaking hypocrisy.

    NT IS a closure programme; albeit a closure programme by stealth.

    Politicians got it in the neck when POs were closed, particularly in rural areas.

    Whereas, if Postmasters give up, and no other mug (sorry, entrepreneur) can be found to take on unlimited liability for 2/6d (12.5p for the younger element), then that is a commercial decision, nothing AT ALL to do with POL or politicians.

    So over time, as the commercial reality of running a PO under the new regime beds in, the weakest will gradually go the wall, leaving POL with a manageable sized network. I can think of no other reason why POL, dedicated to bringing in new business to sub POs, are underming subs by offering exclusive online deals, better currency rates online than through sub POs, and routinely reducing transaction income – these are not indicators that the sub POs are being supported.

    The programme was launched with great fanfare and Locals were offered (up to) £10,000 in capital to convert their branch.

    In our own case, POL actual contribution was moving the safe and alarms, and providing a £1,000 steel cabinet – we ONLY had to find the remaining £32,000 from our “compensation” which was much less than £32k, so we effectively subsidised POL to reduce our income, whilst at the same time having to be open for POL business 60% more hours. So why did we do it? With another convenience store only 150 yards away it was almost impossible for us to say no.

    We bit the bullet in summer 2013 in terms of agreeing to convert, and at that point the figures stacked up, but POL dragged the process out so long with pointless scoping visits, planning visits, budgetting visits etc etc that it was February 15 before we actually converted during which time the compensation was eaten away

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  3. Too true Fim. The £1.34b cost of the project was calculated on the back of the same fag packet that they used to project a steady rise in income and footfall for convertees. They never did a risk assessment on the possibility that their projections could be wrong. Well they have been proved to be wrong and what do they do? Continue down the same ill thought path to oblivion.

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