Executive Summary

National Audit Office Value for Money Report

1. All public sector organisations rely to varying degrees on the collection, transport, and delivery of letters and parcels (postal services) in their communications with citizens, internally, and with other public sector bodies. Of the £750 million spent annually by the public sector on courier and postal services, nearly £650 million (representing 10 per cent [Footnote 1] of the total UK mail market) is spent on post, with £100m spent on couriers. Some £250 million is spent by central government departments on post, with the two biggest spenders, the Department for Work and Pensions and HM Revenue and Customs, accounting for over half and the top ten organisations accounting for 95 per cent of the total.
    
2. The significance of postal services does not lie in costs alone. In many parts of the public sector the use of postal services is vital to the successful delivery of key public services, for example to deliver information, benefit payments, or application forms. Despite the growth in e-services, postal services remain, and will do for the foreseeable future, an essential part of departments’ and agencies’ interactions with citizens.
    
3. Historically Royal Mail has been the monopoly provider of letters under 350 grams as well as being the Universal Service Provider in the UK. [Footnote 2] However, since the Postal Services Act 2000, the mail market has been increasingly opened to other suppliers. Liberalisation has occurred in two phases. Phase One was implemented in 2003, when for the first time, customers could use alternative suppliers to Royal Mail for bulk delivery of letters weighing less than 100 grams or costing less than 80p. Phase Two, in January 2006, removed the final restrictions; in effect no part of the postal market is now reserved for Royal Mail alone, subject to an alternative operator having a licence from Postcomm, where this is appropriate. In mid 2005 Royal Mail was still the dominant supplier having over 97 per cent by volume of total market share across the public and private sectors.[Footnote 3]
    
4. The focus of this report is on how public sector organisations can become more effective procurers of postal services, making the appropriate product and supplier choices and reducing their costs. In particular, we assessed:
    
   1. the progress of public sector organisations in achieving efficiency in their procurement and management of postal services; and
       
   2. what more needs to be done by public sector organisations and the Office of Government Commerce to improve performance and realise financial and quality of service benefits from their postal services, supported by examples of good practice from organisations in both the public and private sectors.

   In identifying opportunities for efficiency gains and reduced costs, the service received by the customer has always been at the forefront of our thinking. The approaches to improved efficiency we highlight in this report and the accompanying volumes, therefore also include the effects on the quality of service provided to customers.
   

   Key Findings
   

5. On the current performance in the use of postal services across the public sector.We found that there is a wide range of performance across the public sector.
   
   The average cost per mail item varies from 31.1p to 21.5p.
   Proportion of outbound mail achieving volume discounts varies from 93 to 15 per cent.

   Departments or agencies with highly centralised output, in particular the Driver and Vehicle Licensing Agency and National Savings and Investments, are able to achieve high levels of volume discounts for their mail, at a level that compares well with leaders in the private sector. The Department for Work and Pensions has a relatively high cost per item which largely reflects its highly distributed network of offices and use of first class mail to send out benefit payments to meet its requirements for security, timeliness and certainty of delivery date. It has, however, made progress in this area. For example, by issuing Winter Fuel payments for 2005 using a second class ‘work share’ [Footnote 4] product rather than first class standard tariff, the Department saved over 10 pence per item (which it estimates will generate an annual saving of some £1.2 million) with no adverse impact on customer service. In general, postal services procurement has been reviewed by the bigger-spending departments, but it has been a low priority area for the majority of organisations.
    

6. On the potential financial savings that can be achieved across the public sector. Our four public sector case study organisations (the Department for Work and Pensions, HM Revenue and Customs, the Driver and Vehicle Licensing Agency, and National Savings and Investments) could demonstrate that they have in recent years achieved significant improvements in the efficiency with which they procure postal services.
    
7. Despite the progress already achieved, we estimate that additional annual savings of nearly £10 million are achievable across the entire public sector by 2006-07, gradually rising to £31 million by 2008-09, from improved efficiency in four main areas:
    
   1. Increased use of price discounted ‘work share’ products: we estimate that across the public sector, annual savings of £9 million are possible by 2008-09.
       
   2. Increased use of lower cost second class and products with longer delivery timescales: we estimate that savings of £9 million are possible across the public sector each year from 2008-09 by organisations appropriately revising the mix of mail classes they use.
      
   3. Increased use of competitive tendering leading to lower cost products for the same or improved levels of performance: We estimate, based on evidence from customers, that organisations can save, on average, 10 per cent on postage costs [Footnote 5] by using alternative suppliers for ‘Downstream Access’ [Footnote 6] or ‘end-to-end’ [Footnote 7]delivery (based on 2005 pricing structures). This could potentially save £8.5 million across the public sector annually from 2008-09.
       
   4. Reductions in the volume of ‘undeliverable’ mail: Reductions will generate productive time savings for processing mail and postage procurement savings, resulting in estimated annual savings of some £4.5 million across the public sector by 2008-09. We reviewed the feasibility of the scale of potential benefits with our case study organisations and have used these figures to estimate savings across the wider public sector, including the education [Footnote 8], health and local government sectors [Footnote 9] (Figure 1). These potential savings may be used as benchmarks against which performance improvement can be judged. Many of the improvements we have identified can be done at low cost and within short timescales, in particular: changes in class of mail, increased use of competitive tendering, reduction in volume of undeliverable items through data cleansing routines, and better choice of mail products (such as Cleanmail and Packet Post [Footnote 10]). The accompanying ‘Good Practice’ guide to this report provides examples of organisations in both the public and private sectors that have realised efficiency gains in their postal services through these and other approaches.

   
   

8. On the extent to which centrally led initiatives could contribute to improved performance. In the light of market liberalisation, OGCbuying.solutions11 will be establishing mail service framework agreements with a number of suppliers for use by all public sector organisations. A key feature of these frameworks has been the close involvement of the main central government clients in their design and negotiation, resulting in advance commitments on the part of departments to use the frameworks. This is an example of good practice that could be used to good effect on future frameworks for other services and commodities. As a result OGCbuying. solutions anticipates that 60 per cent of total public sector mail spend will go through the frameworks. The agency estimates that use of the frameworks has the potential to generate savings of £30 million a year from 2007-08 onwards through lower prices (9 to 30 per cent savings on particular products) as well as unquantified benefits of reduced tendering and support costs. There is some overlap with the four areas we have identified for savings, particularly ‘increased use of competitive tendering’ (though, of course, use of the frameworks does not necessarily entail switching suppliers). Furthermore, as part of the implementation of the frameworks, OGCbuying. solutions will provide enhanced management information, enabling improved contract and supplier management.
    
9. On further aspects of the public sector’s approach that inhibit efficiency. In addition to the potential financial savings, we identified three further aspects of the public sector’s use of postal services that adversely affect efficiency and service quality:
   
   • Post is not always considered as part of an integrated communication strategy. Few public sector organisations have a clear understanding of the willingness and preference of their customers to use lower cost communication channels such as the internet and telephone. As a consequence they have missed significant opportunities to reduce the demand for post and therefore cost. The scale of these opportunities is well evidenced by the work of the Pension Service of the Department for Work and Pensions which, through a switch to greater use of the telephone to meet its customers’ preferences, estimates that it will reduce the volume of in-bound mail by 60 per cent.
      
   • failure to identify and realise the opportunities for joint working. There is limited evidence of public sector organisations working together to aggregate their mail volumes despite the fact that many will send mail to the same customers often on related aspects of business. For example, HM Revenue and Customs and the Department for Work and Pensions have recognised that an opportunity may exist to rationalise the mail they send to employers but negotiations are at an early stage. There are opportunities for smaller organisations to centralise their mail production or sortation with other similar sized bodies to be able to take advantage of product discounts and economies of scale in equipment and productive time, but there are few examples of this occurring. There is also limited evidence of public sector organisations taking advantage of the more favourable terms other organisations have negotiated with suppliers.
      
   • Management structures for postal services are often too fragmented. Responsibility for post is rarely centralised and more often dispersed across the organisation making it very difficult to implement efficiency measures such as aggregating mail to achieve volume discounts. Local managers are rarely held accountable for reducing postal costs, and information on postal spend can be better collated and analysed to enable organisations to take full advantage of the contracts they have negotiated. 11 OGCbuying.solutions is an executive agency of the Office of Government Commerce. Its role is to deliver value for money gains for central civil government and the wider public sector through its dedicated, professional procurement service providing central purchasing contracts and catalogues.

   Overall conclusion on value for money
   

10. Public sector organisations have made good progress in improving the efficiency of their postal services procurement as highlighted by the examples in our four case study organisations and the range of other successful initiatives cited from other public bodies in this report and associated volumes. Our analysis, however, of comparative performance indicates more needs to be done before the public sector is achieving full value for money from its postal services procurement. If our recommendations below are implemented fully then an estimated annual saving of £31 million is achievable by 2008-09.
    
    

    Recommendations
    

11. We identified six main aspects of performance in the procurement of postal services for public sector organisations to focus their efforts on improving. These are summarised in Figure 2 on page 6 . To help organisations to implement these recommendations and realise the potential for financial savings we have highlighted the good practice most likely to achieve better performance in two associated volumes published alongside this report (both associated volumes are also available on our website at www.nao.org.uk):
     
    • A guide to help public bodies improve efficiency, focusing on six areas and drawing on examples of good practice which have enabled organisations in both the public and private sectors to reduce their postage, printing, and processing costs while at least maintaining levels of service delivery.
       
    • A case study volume setting out in more detail the progress, achievements and scope for further improvements in our four case study organisations as well as a ‘good practice’ private sector case study. From our analysis of public and private sector organisations that have made efficiency improvements, we believe the benefits brought about through the carefully managed implementation of our recommendations will outweigh implementation costs. It is difficult to be precise, however, about these costs because many of the improvements identified are dependent on wider changes in organisational policies, business processes and IT and will differ from organisation to organisation. This emphasises the need for robust business cases for change and close working with suppliers if the recommendations are to be successfully implemented and the potential savings
       
12. To assist OGCbuying.solutions in helping public sector organisations improve the efficiency of their postal service procurement and secure the best deals, including maximising the benefits achieved from the framework agreements for postal services, we make the following recommendations. OGCbuying.solutions should:
     
    1. Promote public sector interests in the market place and with the regulator to strike better deals with suppliers and offer a co-ordinated response to the regulator. Public sector spending represents ten per cent of the total mail market. There has, however, been no single, co-ordinated face to the market to negotiate on behalf of the public sector. OGCbuying.solutions, through framework agreements, can encourage suppliers to, for example, develop more innovative products for secure payments and provide alternative delivery timescales. The regulator, Postcomm, consults customers on a range of important issues including pricing and operational standards of practice. OGCbuying.solutions needs to do more to collect views from across the public sector (if this approach is acceptable to its customers, such as local government, and does not preclude their decision-making abilities) and provide co-ordinated and hence more forceful promotion of these views to the regulator.
        
    2. Work to ensure that the potential benefits from the postal framework agreements are realised. OGCbuying.solutions estimates that the public sector can save £30 million per year through use of the frameworks (if the majority of public sector spend goes through the frameworks); however the agency needs to continue to work to minimise the risks involved. The key risks include:
        
       • Capacity for tendering and implementation of the frameworks at departments, centrally at OGCbuying.solutions, and at suppliers is exceeded by demand. The agency will need to manage the demand for the use of frameworks and manage implementation in a phased manner across the public sector. Furthermore, suppliers’ capacity to provide delivery services in a newly liberalised market will need to be monitored to ensure that service performance remains above minimum service standards.
          
       • Inadequate customer engagement across the wider public sector, particularly local authorities, education, and health could potentially result in low demand and implementation of the frameworks within these sectors. The agency has begun engaging customers, particularly in central government, and recognises more work is required in this area. The main change agents for local government, the Office of the Deputy Prime Minister sponsored Regional Centres of Excellence, are also addressing this specific risk through the engagement of local authorities.
          
       • Good postal services practices that are outside of the main thrust of the frameworks will not be supported and encouraged centrally. The frameworks focus on contract and supplier management. In our view significant savings and increased effectiveness are possible in other good practice areas, such as increased use of ‘work share’ products and co-ordinated communication strategies. The agency and the Office of Government Commerce (in its role to spread good procurement practice across the public sector) need to work to incorporate these good practice points into their engagement and implementation work with public sector customers. The two bodies should seek to work with other public sector organisations who promote good practice in this area. For example, the Central Office of Information has successfully worked with the public sector to increase postal efficiency, in the areas of customer data management, marketing strategy, creative and format design and production, and postal product and supplier advice. We believe there is scope for OGCbuying.solutions to use their set-up of the postal services frameworks as a template for future frameworks, and if similarly managed, the agency, and the public sector in general, can realise significant benefits from future work.
          
13. We will, during the course of 2006, be seeking to promote the key messages in this report across the public sector and to support this by developing a range of subsidiary efficiency based tools for use by public sector organisations. For example, we have developed a postal efficiency improvement tree to assist public sector organisations in determining the most efficient procurement approach and the postal services and products that might offer the best value (Figure 3 on page 9) . The tree provides a set of options to:
     
    • reduce the cost of service, through demand management, reduced cost per unit, and improved management structures; and
       
    • improve the quality and effectiveness of their post. The tool can be read ‘left-to-right’ with each step detailing how the objective can be met and also ‘right-to-left’ to capture the business objectives behind particular actions and tactics to improve postal efficiency. The associated volumes to this report describe how public and private sector organisations have implemented these actions and the financial and service delivery benefits they have achieved.
    
    Figures 2 ("Table showing actions needed by departments") and 3 ("Postal efficiency improvement tree") are unavailable in this version of the executive summary.

1.  [back from footnote 1] Royal Mail, 2004-05.
    
2.  [back from footnote 2] The Universal Service Provider (USP) defined under The Postal Services Act (2000) as the company responsible for delivery of mail to each address, and the collection of mail from every access point, in the UK at least once every working day.
    
3.  [back from footnote 3]  Postcomm 2005 Competitive Market Review (based on figures collected for quarter two, 2005-06).
    
4.  [back from footnote 4]Postal ‘worksharing’ involves mailers performing activities such as preparing or sorting mail, often by geographic areas, before providing the mail to their suppliers for final sorting and delivery. They obtain a discounted price as a result, depending on the volumes involved.
    
5.  [back from footnote 5] Savings levels can vary, with some customers achieving significantly higher discounts.
    
6.  [back from footnote 6]Downstream access is where postal services companies other than Royal Mail collect mail from a single customer or from multiple customers (a process refered to as ‘consolidation’), before injecting the mail into Royal Mail’s supply chain for final delivery.
    
7.  [back from footnote 7] End to end service suppliers provide a full service from collection point to delivery destination (in other words mirroring the service provided by Royal Mail).
    
8.  [back from footnote 8]The education sector referred to in this report consists of further and higher education institutions in England, Scotland, Wales, and Northern Ireland.
    
9.  [back from footnote 9] The health and local government sectors referred to in this report cover England, Scotland, Wales, and Northern Ireland.
    
10.  [back from footnote 10] Cleanmail is a Royal Mail product offering discounts based on basic address presentation requirements. Packet Post, a Royal Mail product, offers discounts on weightier items based on minimum yearly volumes. The average cost per mail item varies from 31.1p to 21.5p. Proportion of outbound mail achieving volume discounts varies from 93 to 15 per cent.