Last post; Business Focus (Consignia)

SUNDAY TIMES 7th October 2001
LAST POST;BUSINESS FOCUS

John Waples

Britain's postal service is facing the biggest shake-up in its history. By John Waples and Rupert Steiner.

LAST JULY, in the early hours of a Monday morning, a group of senior directors from Consignia, the renamed Post Office, drove to the five-star Pennyhill Park Hotel in Bagshot, Surrey, for the group's annual think-tank session.

In their briefcases they carried copies of the latest trading figures, which showed targets had been missed, costs had spiralled and -in the new deregulated environment -competitors were chiselling away at its business. They painted a picture of a service in rapid decline, and each executive was aware that tough decisions needed to be made over the course of the next two days.

So when Neville Bain, the group's non-executive chairman, started the debate there was an air of anticipation about what would unfold. But few had any idea that the meeting would set in motion the most dramatic shake-up in the postal service's 350-year history.

The directors agreed that John Roberts, Consignia's chief executive, who joined the company 30 years earlier as a graduate management trainee, and his finance director, Marisa Cassoni, should look at the group's Pounds 8billion cost base to see how much could be taken out.

Ten weeks later, on the morning of the terrorist attack on the World Trade Center, the pair told the board their conclusions. They left little to the imagination. Consignia, crippled by inefficiency, was facing a financial crisis.

Roberts knew that tackling these overheads could force him into a head-on collision with the Communication Workers Union, the most militant union in the country. But he was insistent that if Consignia was to have a future, it needed to lay off as many as one in ten of its 220,000 workforce.

In the last week of September, Roberts wrote to senior union officials telling them he was preparing to take action. He also notified Patricia Hewitt, the trade and industry secretary, and Douglas Alexander, the junior minister with direct responsibility for Consignia.

By last Tuesday afternoon, Roberts and his board knew there was no turning back. He agreed that in the early hours of Wednesday an electronic memo should be sent to all regional managers spelling out the crisis Consginia faced. In his choice of words he was both blunt and direct.

The memo said: "We are living beyond our means and we need to get a grip on this now. We want to take out 15% of our cost base, which equals Pounds 1.2billion. This means reducing our employee and non-employee costs by 15%. We must do this by March 2003."

As soon as the e-mail hit the computer screens, word spread like wildfire around the group's national network. As postmen huddled in corners in their sorting offices, the day was quickly dubbed "Black Wednesday".

But while Britain's 80,000 postmen will be affected, a large part of the cuts will come from Consignia's layers of middle managers, who are now all looking over their shoulders.

During the next 18 months departments will be restructured, closed down or merged and operations outsourced.

Consignia's many critics say Bain and his team have finally woken up to financial realities that the company and its unions have ducked for years.

One observer says: "This company has been a political and management disgrace for years. Twenty-first century reality has finally caught up with this dinosaur."

FOR three centuries, up until the early 1990s, the Post Office enjoyed a monopoly. With its huge national infrastructure, its position appeared impregnable. But beneath the surface, cracks were beginning to open.

Continental rivals were lighter of foot in modernising their domestic operations, while the Post Office's historic agreement with the government to return a percentage of profits to the Treasury was starving it of capital investment. At its peak in the 1990s, this accounted for Pounds 345m a year, equivalent to 80% of its profits.

Michael Heseltine attempted to address the issue in the summer of 1992 when he headed the Department of Trade and Industry. He proposed a part-privatisation, but his idea was bulldozed by the union and backbenchers in 1994.

When Labour came to power in 1997, it resisted privatisation but knew something had to be done. Germany, Sweden, Finland and the Netherlands were all abandoning national postal monopolies and the competitive landscape was changing.

The party reduced the Post Office's annual Treasury payments to 40% of post tax profits. Peter Mandelson, the then trade minister, also approved acquisitions totalling Pounds 600m, the biggest being the Pounds 300m purchase of German Parcels. This came as a breath of fresh air, says a Consignia spokesman. "When we applied to sell fishing licences in the early 1990s, it involved discussion with six government departments."

Last summer Labour made its biggest change yet when it introduced the Postal Services Act. This legislation, which came into effect in March, created an industry regulator, Postcomm, which has since set tight operating targets. At the same time, the Post Office was turned into a public limited company and the postal service was thrown open to competition.

Hays, the transport and logistics group that already moves 200m pieces of mail a year, has picked up the first contract, securing distribution licences in Edinburgh, London and Manchester.

The international freight carriers all have distribution networks in Britain and are waiting for more business to come to the private sector. Nigel Goodson, a director of United Parcel Service, the world's largest delivery company, says the regulator is beginning to remove Consignia's unfair advantages.

He adds: "Consignia has a favourable Vat status and this has enabled it to subsidise loss-making areas such as Parcel Force from its monopoly profits when in the real world it would have been snapped up or eliminated."

The government recruited Allan Leighton, the businessman best known for revitalising Asda, the food retailer, to become a non-executive director at Consignia. Leighton has already had a strong influence on the executive team and has encouraged more external appointments. He has told the board there is a huge gulf between management and the postman on the street, which needs to be addressed urgently.

THROUGHOUT Britain, the postman is seen as as a local hero. Through rain, hail and snow, the morning post is delivered on time and without thanks. It is a service whose roots date back to 1635 when CharlesI needed to boost his income. To do so, he opened his private letter-delivery network to the public.

In 1660, parliament established the General Post Office and in 1784 the first mail-coach service ran from London to Bristol via Bath. The first British pillar boxes were opened on St Helier, Jersey in 1852 and the number has since mushroomed to 120,000.

In 1959, postcodes were introduced in Norwich. Ten years later, the prime minister opened National Giro, the Post Office's banking service, in the same year that a first and second-class letter service was created.

But despite the group's heritage and its reliable service, it has a terrible management and union track record, on a par with British Leyland in the mid-1970s.

More days are lost through strike action at Consignia than any other company in Europe. Wildcat strikes are still called without a ballot, and branch union officers still wield huge amounts of power. Last year there were 340 individual strikes, which led to 63,000 working days being lost.

But now not even the union leaders can ignore the pressures facing the company. In its last financial year, the Post Office reported its first operating loss in 25 years and the interim figures, to be published next month, are also likely to make grim reading.

The pain is being felt in Royal Mail, Consignia's biggest division, which provides Pounds 5.5billion of the group's Pounds 8billion turnover and employs more than 80% of its staff.

The explosion in direct mail, which accounts for one in six of all items sent through the post, has ensured that mail volumes are increasing. But Bain says there is concern that the rate of growth is slowing.

Last year Royal Mail had budgeted for growth of 3.4% but achieved only 2.7%. For the first half of this year, it has only managed 2%. At the same time, Consignia has been unable to increase stamp prices to offset its rising cost base.

The increasing use of e-mail and the fax machine has hit Consignia, and its board believes business levels may fall in the future.

But technology has brought some spin-offs, such as the rise in e-tailing where "snail mail" is the only way to get tangible products into the home.

FOR BOTH Bain and Roberts, the cuts will mark the end of their careers in the company. Bain, the son of a New Zealand railway worker, was appointed for three years, and has agreed to stay for a fourth, although discreet soundings are being made to find a replacement.

Bain has a reputation as a man in a hurry, and the postal service's resistance to change has been frustrating for him. He is a respected City figure who sits on a number of boards, including Scottish & Newcastle and Gartmore Scotland Investment Trust.

He has also written several management books, including The People Advantage, which examines recruiting and encouraging staff. But critics say this skill has not always rubbed off at Consignia. A report last summer by Lord Sawyer, the former Labour general secretary, slammed employee relations at the Royal Mail as "dire" and "adversarial".

Roberts is also coming to the end of his career, but it is likely he will stay on to help the new chairman settle in. His replacement is likely to be external. although some internal candidates are being considered.

For Bain and Roberts to push through their cost-cutting programme, they will need financial help from the government. Bain says: "We do not have enough funding left in the balance sheet to deliver the strategic plan and pay for the investment that is clearly needed."

However, he insists Consignia can be turned round. He says: "It's not too late. We have a plan that will make us viable and profitable. The difficult takes a long time and the impossible takes a little longer."

As part of the restructuring, Consignia is outsourcing its vehicle and building maintenance and is considering doing the same with its IT and administration departments.

At the beginning of next month Consignia will start an advertising campaign starring Elton John to promote the use of mail. Gillian Wilmot, Royal Mail's managing director, says: "The message is that when you order something it doesn't become real until it reaches you, and that's where we come in.

The same message applies to Consignia. Roberts has made a big noise and now he must deliver. If the company fails to rise to the challenge, it will become marginalised and will lose the profitable parts of its operation. As one senior director says: "If Royal Mail or Parcel Force were put up for sale, there would be a queue of buyers wanting to bite our arm off. The advantage is ours to lose."