© Royal Mail 2008. Royal Mail is a trading name of Royal Mail Group Ltd. Registered number 4138203.Registered in England and Wales. Registered office: 148Old Street, LONDON, EC1V 9HQ.

R o y a l M a i l ’ s A p p l i c a t i o n t o t h e P o s t a l S e r v i c e s C o m m i s s i o n f o r r e l i e f f r o m t h e i m p a c t o f I n d u s t r i a l A c t i o n o n a c h i e v e m e n t o f C o n d i t i o n 4 S c h e d u l e d S t a n d a r d s a n d S t a n d a r d i s e d M e a s u r e s ( F o r m u l a Y e a r t = 2 ( 2 0 0 7 / 0 8 ) )

N o t e : t h e q u a l i t y o f s e r v i c e f i g u r e s a n d r e l i e f s o u g h t i n t h i s a p p l i c a t i o n a r e p r o v i s i o n a l a n d s u b j e c t t o a d j u s t m e n t o n s u b m i s s i o n o f f i n a l a p p l i c a t i o n .

Contents

Sections Page

FOREWORD

EXECUTIVE SUMMARY

1. CHAPTER 1: OVERVIEW OF THE APPLICATION_________________________________ 8 1.1 Introduction 8 1.2 Background to the Postcomm review process and this application 8 1.3 Postcomm's approach to the possibility of relief being provided should the

occurrence of IA lead to a decline in relevant quality of service requirements 12 1.4 The basis on which the relief is sought 12 1.5 The occurrence of industrial action 13 1.6 Transformation activity 15 1.7 Quality of service Failures 16 1.8 The adjustments to quality of service being sought by this application 20 1.9 The financial impact of the adjustments being sought by this application 23 1.10 Settlement of the dispute 24

2. CHAPTER 2: SCOPE OF INDUSTRIAL ACTION AND IMPACT ON SERVICES ____________ 25 2.1 Introduction 25 2.2 Overview of Royal Mail's pipeline 27 2.3 National strikes – linked to transformation activity 29 2.4 The first 24 hour national strike on 29th/30th June 30 2.5 The second 24 hour national strike: 12th/13th July 32 2.6 Rolling strikes from 25th July to 8th August 33 2.7 The two 48 hour strikes on 4th- 6th and 8th-10th October 35 2.8 Regional industrial action linked to transformation activity 39 2.9 Regional industrial action – overview of impact on quality of service 39 2.10 Adverse weather and other Force Majeure Incidents 44 2.11 Industrial relations climate 45

3. CHAPTER 3: ROYAL MAIL’S ATTEMPTS TO RESOLVE THE DISPUTE AND CONTINGENCY PLANNING ___________________________________________________________ 51 3.1 Introduction 51 3.2 Royal Mail’s attempts to resolve the industrial action 51 3.3 Corporate priorities and governance procedures 52 3.4 Contingency plan development and preparation 55 3.5 Contingency plan execution 59 3.6 Mechanisms for briefing Postcomm 67

4. CHAPTER 4: ROYAL MAIL'S OPERATIONAL RESPONSE AND SERVICE RECOVERY_______ 69 4.1 Introduction 69 4.2 Return to quality of service 69 4.3 Tail of mail analysis 76 4.4 Benchmarking with previous industrial action 79 4.5 Comparison with previous Force Majeure claims 79 4.6 Comparison with Royal Mail Christmas Performance 80

4.7 Collection & Delivery Standardised Measure Performance 81

5. CHAPTER 5: SUMMARY AND CONCLUSIONS __________________________________ 83 5.1 Background to the application 83 5.2 Background to the industrial action 84 5.3 The occurrence of and reasons for industrial action 85 5.4 Attempts to avoid and subsequently manage the impact of the strikes 86 5.5 Impact of the strikes on quality of service 87 5.6 Conclusions 89

Annexes

Annex 1: "Changing for good – Our Strategy", Communication to Staff, May/June 2007

Annex 2: Condition 4 Scheduled Standards and Standardised Measures

Annex 3: CWU Ballot Paper for Industrial Action

Annex 4: Diary of Incidents and Events Affecting Performance

Annex 5: Chronology of Key Meetings with Communication Workers Union

Annex 6: Local Official and Unofficial Industrial Action

Annex 7: Methodology used to calculate Adjusted Collection and Delivery Standardised Measure Results

Annex 8: Methodology used to Calculate Adjusted quality of service results for the Scheduled Services

Annex 9: Impact Assessment Tables

Annex 10: Methodology for Calculating C-Factor and Bulk Mail Compensation

Annex 11: CWU and Royal Mail Pay and Modernisation Agreement (including Joint Statement on Restoring Good Employee and Industrial Relations)

Annex 12: Journey of a Letter

Annex 13: CWU Letter To Members 20th April 2007

Annex 14: Impact of Industrial Action on Royal Mail’s pipeline – Industrial Action 29th/30th June 2007

Annex 15: Impact of Industrial Action on Royal Mail’s Pipeline – Industrial Action 12th/13th July.

Annex 16: Rolling Industrial Action from 25th July to 8th August

Annex 17: Impact of Industrial Action on Royal Mail’s pipeline – Industrial Action 4th- 6th and 8th-10th October

Annex 18: Examples of CWU encouragement of work to rule activity

Annex 19: Royal Mail Corporate Priorities for Industrial Action

Annex 20: Examples of internal communications material

Annex 21: Detailed Network Plans for Friday 29th June

Annex 22: Detailed Network Plans for 12th/13th July

Annex 23: Example of Network Contingency Plans for rolling strikes (25th July to 8th August)

Annex 24: Example of Posting Box poster

Annex 25: Network Contingency Plan for Industrial Action on 4th -9th October

Annex 26: Network contingency plan for post strike recovery (10th to 13th October)

Annex 27: Day by Day Quality of Service Charts

Annex 28: Reported Daily Pipeline Failures during National Industrial Action Periods

Annex 29: Tail of Mail Analysis by product for National Industrial Action in June, July and August 2007

Annex 30: Tail of Mail Analysis by product for Quarter 3 Industrial Action Period

Annex 31: Collection and Delivery Standardised Measures Analysis – Day by Day Analysis

Annex 32: Press Cuttings

Annex 33: Climate of the dispute

Annex 34: Letter of 21 June 2007 from Sarah Chambers to Adam Crozier

FOREWORD

Royal Mail made an application to Postcomm in Spring 2007 to allow it not to pay compensation to bulk mail users, linked to failure to achieve quality of service targets due to industrial action over the modernisation and transformation of the business during 2007 - 08. The company has also asked for relief on the reduction in the future revenue the company is allowed to earn (the C factor), again linked to quality of service failures as a direct result of the industrial action last year. After careful consideration Postcomm indicated to Royal Mail in June 2007 that provided certain specified criteria were met it was minded to provide Royal Mail with the relief it was seeking. This submission sets out the basis upon which Royal Mail believes it has met the criteria.

The reason Royal Mail approached Postcomm last spring was to enable the company to press ahead with the modernisation and transformation of the business which are essential for Royal Mail’s future ability to deliver high quality services to all its customers and to ensure every user of the post continues to get the benefit of a universal postal service to the UK’s 28 million addresses.

Postcomm’s approval of this submission would remove the financial impact of industrial action over our transformation activity from the independently measured quality of service results for the 2007-08. Over the past two years, prior to the period of industrial action, Royal Mail has shown that it is able to consistently beat quality of service targets, giving customers record levels of service. Failure to meet quality of service targets by a margin of more than 1% would normally result in payments to bulk mail business customers under Royal Mail’s Bulk Mail Compensation Scheme and would additionally reduce the amount of future revenue the company is allowed to make under the terms of its licence.

Royal Mail fully recognises that its customers suffered last year as a result of industrial action by the Communication Workers Union. We are acutely aware of the impact on customers’ businesses of below target performance, and strive to avoid any sort of industrial dispute, wherever possible – and if Royal Mail fails customer service targets as a result of any dispute, the company also faces the risk of substantial compensation payments to bulk mail customers and related adverse financial implications. There was pressure, therefore, on Royal Mail to minimise the risk of industrial action last year by putting off or avoiding modernisation, even though this was essential for our future. At the same time, however, the company had a very real responsibility to take the difficult decisions that would help to secure the long term future of Royal Mail and the service it provides. We knew we had little alternative but to modernise, and this remains the case.

It is in this context that Royal Mail is asking Postcomm to relieve the potential financial impact on the company - which would normally arise from payments to affected business bulk mail customers – because the modernisation of the business is essential to the future of every customer’s service, and to the ability of the UK mails sector to continue to generate significant economic wealth.

This was a case of Royal Mail taking a necessary course of action to secure the company’s future which, while involving short-term pain, has paved the way for long-term gains for every user of the postal service and will underpin the future of the UK postal industry as a whole.

The way in which customers – businesses and consumers, senders and recipients – are using postal services is changing rapidly. The UK market for postal services is now fully competitive. Royal Mail

cannot succeed without modernising every aspect of its operation and its relationship with customers, introducing world-class use of technology, improving efficiency and providing the products and services our customers want and need.

To halt or slow the pace of transformation would have immediate and far reaching consequences for customers:

The one-price-goes-anywhere universal service, which underpins the social value of postal services to consumers and communities, enables businesess to reach every address in the UK and underpins competition by allowing other licensed operators to reach every address, will rapidly become unaffordable. It is now loss making for the first time ever.

As the volume of physical mail falls Royal Mail will not be able to reduce its cost base accordingly, and maintain value-for-money prices for customers.

Last year, Royal Mail reached an historic agreement with the Government on a commercial funding package to allow the company to invest £1.2 billion in the transformation of the business. It is now imperative that the money is spent wisely, to underpin modernisation in every aspect of Royal Mail’s service to customers and to give a proper return on the taxpayer’s investment. Securing agreement to transformation from postmen and women and the unions is clearly an essential step, which had to be taken before investment programmes could begin.

As a result of the agreement reached in Autumn 2007, the company is now getting on with transformation, but recognises that there is still a long way to go.

Royal Mail believes that a decision by Postcomm to provide relief from bulk compensation payments, and the impact of the C Factor, will help to secure transformation initiatives ranging from better information and tracking systems and new automated sorting equipment to more efficient ways of working - by sending a clear signal for the future that the regulatory framework will not allow Royal Mail to be held to ransom by the threat of strike action over transformation.

Ninian Wilson

Operations Director

EXECUTIVE SUMMARY

Royal Mail started discussions with Postcomm in early 2007 regarding the treatment of the financial impact to seek to ensure that the framework within which the company works, including business customer compensation and the customer service quality factor (the C factor) in the price control, acts to incentivise good performance and does not unnecessarily prevent the company from progressing transformation activity that will, in the longer term, benefit customers and safeguard services.

Postcomm has already indicated its support for transformation, and has advised Royal Mail that it is minded to relieve Royal Mail of the financial consequences provided Royal Mail demonstrates that customers’ service quality has been affected by industrial action, and that such industrial action arising from carrying out transformation activity (rather than any other issue) has affected quality of service. Royal Mail is not asking for any adjustment to be made for any other industrial action, or other events which affected performance.

Royal Mail is now submitting its detailed evidence to Postcomm regarding:

• the timing and nature of industrial action and its impact on service;

• the company’s attempts to resolve the dispute and its contingency planning; and

• Royal Mail’s operational response to industrial action and service recovery.

Royal Mail’s submission sets out:

• The causes of industrial action in transformation and modernisation activity.

• The urgent need, and unique opportunity, for the company to undertake transformation in a rapidly evolving competitive market, with support from the company’s shareholder, the Government, in the form of a commercial funding package.

• The extent of national and local industrial action which followed the Communication Workers Union ballot of its members (May 2007), and the resulting disruption to customers’ services. Industrial action had an adverse impact on customers’ services well beyond strike days because of the substantial backlogs created by strike activity.

• The impact of an on-going climate of industrial unrest, again directly linked to transformational change, which saw go slow and work to rule tactics used by union members.

• The basis on which Postcomm is asked to remove the financial impact on Royal Mail through adjustments to the independently recorded quality of service results for 2007- 08 including exclusion from results of letters sent during strike action or the essential recovery period following strike action.

• Royal Mail’s extensive efforts to avoid industrial action and to achieve meaningful support for transformation from the trade unions, through engagement at the highest levels, over

a period of months, and through direct communications with everyone in the business, all of whom would see real changes in the way in which they work.

• The effectiveness of Royal Mail’s contingency planning and operational response in advance, during and after periods of industrial action in minimising the impact strikes had on customers.

On the basis of all these factors, Royal Mail is seeking relief from the requirement to make payments to business customers under the Bulk Mail Compensation scheme of £79.2m, and an adjustment in the reduction of the future revenue Royal Mail is allowed to earn under the price control’s customer service quality factor of £81.0m.

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1. CHAPTER 1: OVERVIEW OF THE APPLICATION

1.1 Introduction

This application concerns the consequences for certain of Royal Mail's regulatory obligations of the industrial action in 2007 arising from the transformation of Royal Mail's business.

Following a submission by Royal Mail explaining the potential, significant financial impact of industrial action upon the business, Postcomm set out in a letter to Royal Mail's Chief Executive dated 21 June 2007 (the "June letter") see Annex 34, that it was minded to decide (in the absence of exceptional circumstances) that in the event of any quality of service failure resulting from industrial action associated with the carrying out of any transformation activity in Formula Year t = 2 (2007/08 "the Formula Year"), it should allow Royal Mail Group Ltd (“Royal Mail”) not to pay compensation to users of bulk mail services and allow it to earn revenue which would normally be contingent on the C Factor in Licence Condition 21(12), as if that quality of service failure had not occurred. By a press release of the same date, Postcomm confirmed that it had suspended the Bulk Mail Compensation Scheme (extant Condition 4(11) of Royal Mail’s Licence) for these reasons.

The June letter made it clear that Postcomm could not make a final decision until the end of the Formula Year. This document is Royal Mail’s application in respect of the impact of industrial action caused by transformation on quality of service for the Formula Year.

This application has benefited from discussions with Postcomm and KPMG, the independent assessors employed as part of the process set out in the June letter.

We are pleased to note that, as Postcomm is aware, the CWU Postal Executive reached agreement with Royal Mail on 12th October and ratified deals on pensions, pay and transformation, the latter which it recommended in a ballot of its membership. The ballot closed on 27th November, with over 60% of employees voting in favour of the deal, thus ending the national industrial relations dispute. The CWU also confirmed to Royal Mail on 7th December 2007 that the ballot on Pay Conditions and Royal Mail’s Business Plan had been withdrawn.

1.2 Background to the Postcomm review process and this application

The UK postal market is becoming increasingly competitive. However, in our view, the market (and users of postal services) require a financially viable and efficient Royal Mail at its centre. Moreover, the Postal Services Act 2000 requires that Postcomm has regard to the need for licensees to have sufficient resources to undertake their Licence obligations. This helps ensure the provision of the one-price-goes-anywhere universal service, as well as the provision of the access infrastructure that other postal operators use, each of which contributes to the development of an effectively competitive market.

Royal Mail however must adapt to the changes in the market and develop and innovate in an efficient and effective way. This requires Royal Mail to transform its Letters business and all of its operations. These developments must be seen against the worsening of Royal Mail's current and likely future financial position resulting from changes to market conditions and Royal Mail's pension deficit.

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Royal Mail is very clear about what needs to be done to transform its Letters business, with these changes impacting on every part of the Royal Mail operational pipeline from collection and sorting through to delivery. However, transformation is not limited to operational changes such as the introduction of new technology. In addition to the deployment of new automated sorting equipment to improve efficiency, Royal Mail Group’s strategy establishes Royal Mail’s plans for transforming the business through activities such as renewing the product portfolio to better meet the needs of customers and new remuneration packages that will drive increased workforce flexibility, as well as vital pension reform. It is only through these changes that a vibrant and successful Royal Mail will be able to compete in the market place and meet the universal service obligation.

The Royal Mail Letters plan was communicated to senior managers in May 2007 and then to all operational staff in June 2007 via the “Changing for good – our strategy” briefing for postmen and postwomen, (See Annex 1). This forms part of Royal Mail's broader strategy and is focused on transforming the business in order to ensure that it can succeed in the long term and serve its customers, and the UK itself, in a competitive market where other operators are more efficient (because they have already modernised) and have lower costs. This plan sets out a number of key targets:

• To maximise profitable revenue

• To become the lowest cost operator with the best quality of service

• To achieve world class productivity through investment in the business, and

• To have engaged, flexible people working in the business.

These changes are to be achieved by a wide range of transformational change initiatives impacting on Royal Mail’s collection, processing, network and delivery operations. They will affect the ways of working, terms and conditions and remuneration of Royal Mail employees (for example, through reviews of collection frequency, introducing walk sequencing and changing associated working hours, introducing flexible working, reducing night shifts and Sunday working, and introducing team working).

The finalisation of the financing package with Government in March 2007 enabled Royal Mail to start these transformation activities, and the financing enables the plan.

Royal Mail additionally relies upon the revenue allowed under Licence Condition 21 (which determines the amount of money Royal Mail is allowed to earn on it price controlled services), assuming that relevant quality of service standards are met, in order to fund transformation activities and to contribute towards the ongoing financial viability of Royal Mail while it undertakes such activities. The price control was established on the basis of discussions between Royal Mail and Postcomm and its advisors as to the plans for investment in the business, and this formed the basis of certain allowances under the price control, which also takes into account assumptions such as the likely level of business, cost structures and efficiency gains. Royal Mail also committed to capital expenditure for the purposes of making operational savings related to its transformational strategy during those discussions with Postcomm – requirements which are built in to the price control.

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Prior to the Industrial Action ("IA") that commenced in June 2007, Royal Mail had been in discussion with the Communication Workers Union ("CWU") over many months explaining the transformation changes required and the importance of these changes. The CWU said that it was in favour of modernisation (and transformation), but only in return for improvements to terms and conditions, including pay, as the following quotes evidence:

“We have told Royal Mail that we are prepared to deal with Major Change, Efficiency and the Challenges facing the company – but this is conditional on them significantly improving our members’ terms and conditions and honouring the commitments they made to raise the value and status of post workers’ jobs.” Letter from Dave Ward to Allan Leighton, published on CWU website, 13th June 2007.

“Royal Mail’s Business plan accepts failure from the outset. There is no vision – no ambition – just a defeatist attitude towards competition.

Rather than grow the business, Royal Mail’s only answer is to revert to type – cutting jobs, cutting pay, cutting the service. These panic driven measures mean it is impossible for us to succeed.

The CWU really care about your future, the future of Royal Mail and our public service. It is for these reasons that we all have a responsibility to reject their business plan….” Dave Ward, Deputy General Secretary, Royal Mail Pay Review, 22nd May 2007.

These citations demonstrate the view of the CWU that transformation/modernisation would be used by Royal Mail as a means of simply reducing jobs, pay and benefits (including pensions), whereas Royal Mail was driven by the need to become more efficient and productive through changes in working practice (e.g. by the introduction of new machinery) which would inevitably change ways of working and may lead to a reduction in the workforce. Transformation thus covers all aspects of changes to Royal Mail Letters’ business from the introduction of new machinery, to changes to working hours and shift patterns, through to pay and pensions.

Pension reform is a vital part of and is intrinsically linked to this transformation of the business, in light not only of the pension fund deficit but the significant, on-going payments into the current schemes. This issue was discussed with Postcomm during the last price control negotiations and some allowance was made in the price control, to enable Royal Mail to repay the deficit over the 17 year period agreed with the pension trustee. However, more needed to be done to solve the pensions problem going forward, through changes to the pension schemes, in order to reduce the amount of money that Royal Mail pays into the schemes.

Royal Mail could no longer afford to delay the transformation plans and so had to plan to proceed despite CWU opposition. Transformation is designed to enable Royal Mail to improve its productivity and become more efficient (whilst maintaining excellent quality of service). This will bring about cost savings which will benefit customers and allow Royal Mail to remain as a viable postal operator in the competitive market in the longer term.

Royal Mail must also consider, as must Postcomm, the continuing provision by Royal Mail of a one-price-goes-anywhere universal service and the ongoing ability to finance such provision and, generally, to be able to fund the meeting of its Licence obligations. These requirements are woven

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into the transformation plans, the central importance of which is recognised by government and by Postcomm, as set out in the June letter.

The efficiency gains and requirements for cost control built into the current price control and the necessary transformation plans to bring these about (which are made even more necessary by the changes to Royal Mail’s financial and competitive position) can no longer be delayed. This position is not altered by Postcomm’s recent decision to allow some price rebalancing, as there is no change to the amount of overall revenue that Royal Mail is permitted to earn on its price controlled services.

Royal Mail considers changes to bring about flexibility in the workforce and improve the business’s long term financial position – which need to be achieved through changes to working practices, pay, pensions and terms and conditions - to be a vital part of transforming the business. The CWU also links these elements to transformation – but as a condition to agreeing to transformation rather than part of it.

It was evident to Royal Mail’s Board early in 2007 that the potential for IA related to transformation was high, with expected regulatory consequences – for bulk mail compensation payments and the C Factor thought to be in the region of £300m – hence the discussions which Royal Mail commenced with Postcomm.

As Postcomm noted in the June letter (which is described in more detail below), Royal Mail's Directors took the potential adverse financial consequences of IA so seriously that they considered it to be their duty to endeavour to mitigate such consequences in order properly to discharge their duties as Directors.

As the transformation of Royal Mail is a necessity, but with the risk of significant adverse financial consequences and adjustments or payments required to be made through or under its Licence should quality of service be adversely affected, Royal Mail therefore applied to Postcomm in early May 2007 for:

a) the suspension or modification of the Bulk Mail Compensation Scheme1, and

b) the value of ft in Condition 21(12) (i.e. the adjustment figure to allowed revenue for

failure to meet quality of service targets) to be increased to 1, thus allowing Royal Mail to earn revenue that would normally be contingent upon the C factor2,

1 "Bulk Mail Compensation Scheme" is defined in the June letter as the provisions (excluding paragraphs 3-13) of the Standards of Service Compensation Scheme of Royal Mail annexed to the determination of the Commission dated 7th October 2003, in respect of which Royal Mail is obliged to meet its obligations by virtue of Condition 4(15) of its licence.

2 Under the so-called C factor, allowed revenue is automatically adjusted by up to 5% if quality of service targets are not met. "C factor" is defined in the June letter as the customer service quality factor within Royal Mail's price control, set out in Condition 21 (12) of Royal Mail's licence, providing for an automatic adjustment of up to 5% of allowed revenues in a Formula Year for its stamped and metered mail, outbound international Airmail and surface mail, Standard Parcel products and postcode area level performance if Royal Mail's performance meets certain targets for those services, in that Formula Year.

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in the event that IA arose as a result of transformation and caused a decline in Royal Mail's performance against specific scheduled standards and standardised measures (together referred to as "quality of service").

1.3 Postcomm's approach to the possibility of relief being provided should the occurrence of IA lead to a decline in relevant quality of service requirements

Postcomm explained in its June letter the balancing exercise it had undertaken, in reaching its ‘minded to’ decision, between the potential financial consequences on Royal Mail and mail users of a short term deterioration in quality of service as against the potential longer term improvement in Royal Mail's financial position and subsequent improvement in the security of the universal service of providing relief from these regulatory penalties.

In doing so, and after consultation with Postwatch, Trade Association Forum, Mail Users’ Association, Mail Competition Forum, CWU and Amicus, it concluded that, on balance and having regard to its statutory duties, it was minded to decide (in the absence of exceptional circumstances) that it should allow Royal Mail, on the occurrence of quality of service failures resulting from IA associated with the carrying out of transformation activity, not to pay compensation to users of bulk mail services and to earn revenue which would normally be contingent on the C factor as if, in either case, those quality of service failures had not occurred. In considering its final decision on whether and the extent to which to attribute quality of service failures to IA arising due to the carrying out of a transformation activity, Postcomm stated that it would apply the process set out in the Annex to the June letter.

The June letter requires Royal Mail to demonstrate the following criteria (“the Criteria”), namely that the IA in relation to which it seeks relief:

1. arose as a result of carrying out a transformation activity and not for some other reason, and

2. has had a direct causal link to quality of service failures.

The Annex requires Royal Mail in its application to

• provide an explanation of and such evidence as Royal Mail can reasonably provide to explain the causal relationships between quality of service failures for which relief is sought and IA related to one or more transformation activities; and

• an explanation of the efforts undertaken by Royal Mail to mitigate the effects on quality of service caused by that IA.

Postcomm's own assessment is to be undertaken against the Criteria set out in the June letter itself.

1.4 The basis on which the relief is sought

Royal Mail sets out in this application how the Criteria were met during the Formula Year and how quality of service during the Formula Year was affected by IA arising as a result of transformation activities.

We show the actual quality of service results for the quarters in the year when such IA took place and how they have impacted on full year performance, and demonstrate the extent to which these

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figures should be adjusted to take into account the causal effect of IA caused by transformation activity3. We also show the impact such an adjustment would have on payments under the Bulk Mail Compensation Scheme and loss of revenue under the C Factor.

Thus the approach adopted is to seek adjustments to the recorded quality of service (reflected in the final, adjusted annual quality of service figures), in the same way that Postcomm agrees to adjustments to quality of service using the so-called “force majeure” process for other events which have an impact upon quality of service and which are beyond Royal Mail’s reasonable control (e.g. flooding). Agreed adjustments to the quality of service figures will directly impact upon the extent to which bulk mail compensation is payable under that scheme and the extent to which the C factor adjustment applies.

The Annex to Condition 4 of Royal Mail’s Licence sets out the services (referred to as “scheduled services”) to which quality of service standards (referred to as “scheduled standards”) set out in that Annex apply (see Annex 2 to this application). There are eight groupings of scheduled services, to which the scheduled standards apply4. The Annex also sets out an additional four service delivery (i.e. non-product specific) measures (referred to as “standardised measures”) and sets targets (scheduled standards) for them: postcode area target, percentage of collection points served each day, percentage of delivery routes completed each day and percentage of items delivered correctly.

As is shown in Annex 2, failure to meet the quality of service scheduled standards has different consequences, i.e. the C factor applies to some and not others, and the Bulk Mail Compensation Scheme only applies to scheduled services 3, 4 and 5 (namely Bulk 1st Class, Bulk 2nd Class and Bulk 3rd Class).

IA has a different impact on different services (influenced by factors such as the due product delivery period) and also on the standardised measures. For example, the fourth standardised measure – percentage of items delivered correctly - has not been affected by the IA as, on the days that delivery has taken place, it has been done accurately (as measured independently).

1.5 The occurrence of industrial action

Notwithstanding all the extensive efforts by Royal Mail as described further in Chapter 3 of this application, the CWU in May 2007 balloted its members to strike in relation to “Pay Conditions and Royal Mail’s Business Plan”5. Annex 3 provides a copy of the ballot paper.

Following this national ballot, where employees voted to reject Royal Mail’s offer, a series of official national strikes were held:

• firstly, two 24 hour national strikes were held on 29th-30th June 2007 and on 12th-13th July 2007;

3 Through removal of test letters (“samples”) posted on certain days from the calculation of quality of service results.

4 Although in the case of the eighth – Special Delivery – the Bulk Mail Compensation Scheme and the C factor do not apply.

5 “Pay, Conditions and Royal Mail’s Business Plan” are the words used by the CWU on the ballot paper. In many other communications the CWU referred to the strikes as “Pay, Efficiency and Royal Mail’s Business Plan.”

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• then what can be described as "rolling industrial action" targeted at specific parts of the Royal Mail service delivery pipeline occurred during the period 25th July to 8th August 2007;

• followed by two 48 hour national strikes on 4th-6th October 2007 and 8th-10th October (resulting in effectively 6 consecutive days of lost service).

In total, the equivalent of 628,614 full working days were reported as being lost to IA between 4th June and 2nd December 2007.

In addition, a number of local stoppages occurred during these periods, a significant number of which amount to IA linked to Royal Mail's transformation activities. Such stoppages, where they arose as a result of transformation, are included in this application to the extent explained later in this application.

In addition to the specific strike days described above, Royal Mail was subject to an extremely difficult industrial relations climate, adding to the challenges faced in returning work to normal. The dispute resulted in significant unofficial, local action and other actions not directly related to transformation but which are indicative of, and contributed to, the worsening climate of industrial relations. The dispute was also peppered with “go-slow” and “work to rule” tactics which had an immediate impact upon the ability of Royal Mail to achieve its quality of service targets, as normal working practices were not adhered to. Combined with poor staff morale, increased levels of sick absences and the general pressure of working during the time of an industrial dispute, these tactics undermined Royal Mail’s ability to meet its quality of service targets – as more fully explained in section 2.11. The press cuttings at Annex 32 and the documents at Annex 33 give a flavour of the climate that existed over these few months.

Annex 4 sets out a diary of key incidents and events that had a detrimental effect on performance during the period affected by IA, and clearly shows which of those incidents were IA which arose as a result of transformation activity and therefore form part of this application, and which do not. However, it is not possible to identify every small event that contributed to the wider degradation in quality of service during the year as a result of work to rule and go-slow activity. For example, it would be impractical to record details of every incident where a postman/woman took an excessively long amount of time to prepare their delivery and to quantify the impact of such actions on, say, the percentage of delivery routes completed each day.

Such actions were particularly widespread in the build up to and after the October national strikes when the industrial relations climate declined further (amidst significantly increased levels of localised IA and other tactics) and this seriously hindered Royal Mail’s efforts to perform at target level before, during and after the main incidents of IA.

Royal Mail has consistently set out the necessity for the changes that the business needed to make and continuously offered to explain further to the CWU leadership the requirement for business transformation, as well as attempting to resolve the IA once it had commenced. Annex 5 provides a chronology of key discussions/communications with the CWU relating to transformation activities and the attempts made by Royal Mail to firstly avoid, and then end, the IA. At Annex 33 we show a sample of correspondence between Royal Mail and the CWU and at Annex 21 a sample of the attempts made to influence employees to accept the necessary transformational change.

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It needs to be clearly understood, however, that settling the industrial dispute on unsatisfactory terms was not an option – a settlement that would not allow the transformation to go ahead or which significantly undermined the planned transformation would be a failure to protect the long term interests of the business and therefore of customers. It would also have made the government funding redundant and impaired the business’s ability to continue to obtain revenue adjustments under the price control, taking into account cost-cutting and increased efficiency assumptions.

It should be noted that during the first and last quarters of the Formula Year, Royal Mail encountered no national IA and a negligible amount of localised IA in relation to pay, pensions and/or the deployment of major transformational change. Clearly it will take time for Royal Mail to rebuild the trust and positive working relationships that were lost as a result of such extensive IA. However, Royal Mail is not seeking relief for any IA during the periods mentioned above.

1.6 Transformation activity

By "carrying out a transformation activity", Royal Mail understands Postcomm to refer both to the planning for and also the implementation of such activities. As the June letter recognised, where IA occurs due to the proposed transformation activities, it follows that such activities cannot usually be commenced until any such action has ceased. Indeed, an important aspect of the basis for seeking relief is the need to mitigate the cost to Royal Mail of the consequences of such action in order to be able to finance transformation activities.

However, transformation activities were already in the planning stages in many units as a result of the need to deliver significant efficiency improvements – for example those requiring delivery revision activity such as deployment of the delivery best practice, delaying delivery start times and closing most night opening Delivery Offices. In some instances, this led to localised IA running along side or in conjunction with the main dispute with the CWU. Annex 6 sets out a full list of local official and unofficial IA during the period affected by IA and shows, for example, that flexible resourcing initiatives and moves to close delivery offices - all as part of the wider strategic plan for Royal Mail Letters to transform its business - were already causing IA.

In addition, Royal Mail had to ensure compliance with new EC legislation relating to 56mph driving speed restrictions for 7.5 tonne vehicles, which became law in January 2008. These changes, referred to as Network 2007, required the restructuring of Royal Mail’s network operations and duty patterns in delivery, resulting in changes to the start time for over 100,000 delivery postmen and women.

Our employees viewed these changes as part of an overall package of transformation driven by Royal Mail, and the CWU attempted to use the changes as both a bargaining and propaganda tool during the dispute:

"The fresh wave of strikes is against the background of Royal Mail confirming the first stage of their so called modernisation plans will be imposed on a large section of the workforce on the 13th August. This involves significant network changes, later delivery start times and permanent reductions in customer services. It represents a totally unnecessary attack on postal workers’ jobs, pay and conditions.” Letter to Branches 2nd

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August 2007, Billy Hayes (General Secretary) and Dave Ward (Deputy General Secretary).

‘Modernisation’ e.g. automation such as walk sequencing machines, and use of more efficient working practices, is sometimes used synonymously within Royal Mail and the CWU with 'transformation' (or change) to cover what needs to be done to ensure that Royal Mail can take its place amongst its currently more efficient competitors. One of the primary aims of transformation is to increase operational flexibility – the methods to achieve this include pay and changes to employment terms and working arrangements (as outlined in section 1.2 above).

This application explains how the IA and related tactics (outlined in section 1.5 above and described in more detail later in this application) were directly linked to the CWU's opposition to Royal Mail's plans for undertaking transformation activities during the period for which relief is sought.

The Integrated Operational Plan submitted to Postcomm during the last price control discussions shows how the business change and pay and conditions are inextricably linked. Pay, pensions, terms and conditions of employment, improvements in training and team working are all examples of the elements of the overall business transformation.

1.7 Quality of Service Failures

The IA had an obvious direct impact on quality of service on each day that it occurred (whether it was the full day national strikes or the targeted action removing a specific part of the operational pipeline, as such action in practice impacts the whole network). The number of CWU members striking (and the geographical spread of the strikes) was such that Royal Mail was unable to provide a normal service on those days. No amount of contingency planning or other efforts could have prevented this.

However, quality of service is affected not just on the day of action but for a period of time thereafter whilst the business recovers, due to the backlog of mail which needed to be handled on post strike days. Clearly Royal Mail’s network is designed to deal with certain peaks and troughs in volume, but not to the extent of the actual backlog experienced from the days of the IA6.

Royal Mail strove to return its quality of service to normal standards as soon as it reasonably could in the circumstances and invested during and after the IA in service restoration (see Chapter 3 for more details of efforts to mitigate the effects of the IA). This objective was made more difficult by the general climate of industrial relations during the period of the dispute and specific action taken by CWU members, including “work to rule” and “go slow” tactics, particularly before and after the October national strikes, as outlined in section 2.11 below.

As was discussed with Postcomm at various meetings when Royal Mail provided both Postcomm and Postwatch with regular updates, Royal Mail took the decision to limit overtime to the normal levels at

6 Royal Mail handles c. 60m items per day, on a “normal” day. It is already recognised by Postcomm that during the peaks of mail over the Christmas period, Royal Mail cannot be expected to meet the same quality of service as at other times of the year. For this reason, the quality of service targets (scheduled standards) in the Annex to Condition 4 of Royal Mail’s Licence, do not apply during the period commencing on the first Monday in December and ending at the start of the first working day after the New Year holiday.

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each office – as allowing staff to make up for lost earnings on strike days by undertaking very high levels of overtime on other days would have been a bizarre incentive to continue the dispute. In many offices staff, in any event, declined to take up the planned overtime that was available, thereby restricting Royal Mail capacity and prolonging the recovery period.

1.7.1 Scheduled Services

For the reasons explained in Chapter 4 and the Annexes, Royal Mail is seeking relief for national strikes affecting the scheduled services7 (by removal of quality of service samples posted) between the following dates:

Table 1.1 Exclusion Dates for Quality of Service Failures (scheduled services) resulting from National Industrial Action

For 1st Class products

(Retail 1st Class, Bulk 1)

Items posted between 28th June

and 5th July (inclusive)

Items posted between 12th July and 14th August

(inclusive)

Items posted between 3rd September and 2nd

December (inclusive)

For 2nd Class products

(Retail 2nd Class, Bulk 2)

Items posted between 26th June

and 3rd July (inclusive)

Items posted between 10th July and 12th August

(inclusive)

Items posted between 3rd September and 2nd

December (inclusive)

The most significant incidents (in terms of duration and number of people involved) of regional IA during the Formula Year were in Oxford, West of Scotland, London and Liverpool. As these incidents occurred immediately before the national strikes and/or during the recovery periods it has not been possible (or necessary) to quantify their impact separately – as it is not possible to distinguish whether an item of mail has been delayed as a result of the recovery period from the national strike or as a result of the regional strike.

The impact of other localised IA linked to transformation activity (see chapter 2) has also not been quantified and as such does not form a direct part of the claim for relief, as the majority of this happened during the wider period of relief which Royal Mail is seeking for the IA and associated recovery period.

Royal Mail is not seeking relief between 14th August and 2nd September because performance was, on average, at target level during this period. However, it should not be assumed that performance had returned to ‘normal’ during this period nor that Royal Mail had overcome all the industrial relations problems encountered earlier in the year. In fact, Royal Mail was still experiencing the effects of the poor industrial relations climate during this period and this is demonstrated by the

7 With the exception of groupings 5 to 8 – Bulk 3, European International Delivery, Standard Parcels and Special Delivery – in respect of which a claim is not made.

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fact that quality of service performance for 1st Class retail was only just performing at target level when it had performed at 94.5% in the second quarter of the previous year.

There was a more prolonged impact on performance in the period between 3rd September and 2nd December as a result of 4 days of consecutive national IA in October (effectively leading to 6 lost days taking account of the weekend), compounded by the general worsening of the industrial relations climate and the fact that a significant number of managers had worked long hours over a sustained period to process and deliver mail whilst continuing to perform their managerial duties following the earlier national strikes. In fact, in advance of the 4 days of national action, as the agreed period of calm was coming to an end, Royal Mail saw a steep increase in the level of work to rule, go slow and unofficial IA as ongoing negotiations failed to find a resolution. The September to December period saw the culmination of the ever-worsening industrial relations climate, as the dispute reached its climax and managers struggled to continue to cope, having already gone through a summer of IA.

For these reasons, which are explained in greater detail in Chapters 2 to 4, Royal Mail is seeking relief for the complete duration of the period from 3rd September until 2nd December, although it should be noted that the impact of the worsening industrial relations climate before the October national IA was small in relation to the impact of the national action itself, and therefore has only a small impact on the C-factor and Bulk Mail Compensation for which Royal Mail is seeking relief in this application.

1.7.2 Standardised Measures

For the standardised measures of percentage of collection points and delivery points served each day, Royal Mail is seeking relief for national strikes by removal of all performance results for the following dates:

Table 1.2 Exclusion Dates for Collection and Delivery Failures (standardised measures) for National Industrial Action between 29th June and 10th October 2007

For % of Collection Points served each day

(Note: Relief is also being sought for local industrial action linked to Transformation – details provided at Annex 6)

- Friday 29th June + Saturday 30th June

- Friday 13th July + Saturday 14th July

- Thursday 26th July + Friday 27th July

- Saturday 28th July + Monday 30th July

- Tuesday 31st July + Wednesday 1st August

- Thursday 2nd August + Friday 3rd August

- Thursday 4th to Saturday 6th October

- Monday 8th to Wednesday 10th October

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For % of Delivery Points served each day

(Note: Relief is also being sought for local industrial action linked to Transformation – details provided at Annex 6)

- Friday 29th June + Saturday 30th June

- Friday 13th July + Saturday 14th July

- Thursday 26th July + Friday 27th July (Mail Centre sites only)8

- Saturday 28th July + Monday 30th July

- Tuesday 31st July + Wednesday 1st August (Mail Centre sites only)

- Thursday 2nd August + Friday 3rd August

-Friday 5th to Saturday 6th October

- Monday 8th to Wednesday 10th October

For these standardised measures, the approach adopted has been to remove from the performance measure9 all performance results of collection points served and delivery routes completed for the day of national IA and the following day. The day following national IA has been included as performance of the measures was also affected on those days due to failures to complete duties caused, amongst other things, by late starts due to return to work briefings and the generally poor climate of industrial relations.

In fact, the poor industrial relations climate did result in delivery and collection failures beyond the strike day and following day. However, Royal Mail is not seeking relief beyond strike day plus one as the subsequent failure levels are low.

It should be noted that whilst quality of service performance is independently measured, and hence measurement continued unaffected during this time, collection and delivery performance is self measured by Royal Mail. For collections this is done via the use of Access Barcoding Scanners, where a barcode in each post box, Post Office Ltd site or customer premises is scanned to confirm that a collection has taken place. These scanners are downloaded at the end of the day and reasons are provided by a Royal Mail manager if a scan has been missed.

During the IA and subsequent recovery period, these managers were required to carry out a number of collections and/or deliveries themselves to maximise the level of service given to customers – in addition to their many other duties - and this meant that the scanner downloading process was not always completed to the same rigorous standards as normal. Royal Mail believes that performance results for the collection standardised measure have been depressed as a result of Royal Mail

8 Thursday 26th July was a national strike day for Mail Centres only. Therefore, the only delivery failures relating to this strike occurred in Delivery Offices which were co-located in the Mail Centre (as the Delivery Office would have been on strike alongside the Mail Centre).

9 The first standardised measure (postcode area target) is treated in the same way as the scheduled services. No claim is made in respect of the fourth standardised measure – percentage of items delivered correctly.

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prioritising ‘delivery of service’ over ‘measurement of service’. However, Royal Mail has no way of quantifying the impact of this and is therefore not seeking specific relief for this issue.

It should also be noted that work to rule and go slow activity continued well beyond the last day of national strikes, and continued to have an impact upon the achievement of the standardised measure targets. Again, as Royal Mail cannot quantify the impact of these activities, it is only seeking relief for the national strike days and the day after, plus local IA linked to transformation.

1.8 The adjustments to quality of service being sought by this application

As explained at paragraph 1.4 above and in accordance with the principles and process set out in the June letter, this application seeks relief from the potential financial exposure arising due to the IA which arose during the Formula Year as a result of transformation activity, by showing the adjustments to measured quality of service that, in Royal Mail’s opinion, are appropriate and justified.

Table 1.4 sets out the measured quality of service performance for scheduled services and standardised measures (3 month rolling average) in the Formula Year 2007/08. It provides a summary of the unadjusted performance results and shows the results as adjusted in the way that Royal Mail is seeking in this application.

Table 1.4 Impact on Performance during 2007/08 (3 month average)

Quarter 1 Un-

adjusted Result10

Quarter 2 Un-

adjusted Result

Quarter 2 Adjusted Result

Quarter 3 Un-

adjusted Result

Quarter 3 Adjusted Result

Quarter 4 Un-

adjusted Result

Scheduled Services

Retail 1st Class

93.0% 93.2% 78.4% 93.0% 79.2% Exclude entire

Quarter

92.0%

Retail 2nd Class

98.5% 98.8% 94.8% 98.9% 91.4% Exclude entire

Quarter

98.8%

Bulk 1st Class

91.0% 92.6% 75.9% 92.0% 76.0% Exclude entire

Quarter

91.6%

10 Note: Both the adjusted and unadjusted figures are interim and subject to change by final year end – although the extent of change is expected to be minimal.

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Bulk 2nd Class

97.5% 98.0% 92.6% 97.4% 88.3% Exclude entire

Quarter

98.0%

Standardised Measures

%of collection points served each day

99.90% 99.90% 96.59% 99.79% 95.68% 99.80% 99.87%

%of delivery routes completed each day

99.90% 99.98% 95.07% 99.84% 95.36% 99.67% 99.95%

Indicates target level performance not achieved

Indicates target level performance achieved

It should be noted that Royal Mail is not seeking relief for the financial impact associated with 6 of its service standards (as outlined at Annex 2):

Bulk 3: The full year result for Bulk 3 is 96.7%. This result is greater than the 96.5% threshold level at which Bulk Mail Compensation is incurred. Therefore, no relief is being applied for in relation to this standard.

Standard Retail Parcels: The full year result for Standard Retail Parcels is 90.4% (0.4% above target level). Therefore, no relief is being applied for in relation to this standard.

European International Delivery: The full year result for European International Delivery is 92.4% (7.4% above target level). Therefore, no relief is being applied for in relation to this standard.

Postcode Area Target %: Royal Mail incurs the maximum penalty of £12.6m when 6 or more postcode areas have performed at or below the 90.5% C-factor threshold level for 1st Class Retail Delivered performance. Even with adjustment for the exclusion periods set out in this application, more than 6 postcode areas would perform below target level. Hence, Royal Mail is not seeking relief for C-factor associated with this standard.

Special Delivery: Royal Mail’s Special Delivery product has its own scheme which allows customers to claim compensation for delay of their items. Therefore, neither C-factor nor Bulk Mail Compensation apply to this product.

Correctly Delivered Mail: As explained previously, this standard has not been affected by the IA.

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It should also be noted that Royal Mail quality of service results are subject to a series of checking and assurance processes which will not be completed until late May. However, in the interest of publishing this application in advance of the public meeting on 14th May 2008, this document contains interim year end results. Therefore, all results shown in this application are subject to change.

However, Royal Mail does not anticipate any significant changes to these results. Any final changes will be marginal and will not affect the core of this application, i.e. the dates, locations and services for which Royal Mail is seeking relief. Royal Mail expects to provide Postcomm with an updated submission in June 2008, and the final application will be subject to full independent assurance by KPMG.

The methodology used to calculate the adjusted collection and delivery results and the methodology used to calculate the adjusted quality of service results are shown at Annex 7 and Annex 8, respectively.

Table 1.5 illustrates the impact that the IA had on full year performance (Formula Year t = 2 )

Table 1.5 Impact of IA on performance

Scheduled Standard

Unadjusted Result

Adjusted Result

Scheduled Services

Retail 1st Class 93.0% 85.1% 92.7%

Retail 2nd Class 98.5% 95.7% 98.8%

Bulk 1st Class 91.0% 83.4% 92.1%

Bulk 2nd Class 97.5% 93.9% 97.8%

Standardised Measures

%of collection points served each day 99.90% 97.76% 99.85%

%of delivery routes completed each day

99.90% 97.35% 99.86%

Indicates target level performance not achieved

Indicates target level performance achieved

A full product breakdown of the details shown in Tables 1.4 and 1.5 is provided at Annex 9.

As is evident, these adjusted results would still not leave Royal Mail in a position of achieving all of its end of year targets for 07/08. This shortfall is not attributable to any lack of management control of or lack of emphasis on quality of service during this period. The national quality of service

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results prior to the first day of IA on 29th June 2007 were above target level and would have been expected to improve in the period 4th June to 2nd September 2007, which is traditionally/seasonally our highest performing quarter. Results for the period after 2nd December 2007 have shown a strong recovery – after such a prolonged industrial dispute – with the majority of scheduled standards and standardised measures performing at target level.

There has, however, undoubtedly been an impact of the industrial relations dispute on staff morale and commitment, with the deployment of tactics such as work to rule and go slows. These behaviours have had an impact upon Royal Mail’s ability to recover from the days of IA and to achieve the scheduled standards during this period. This was particularly the case before and after the 4th-10th October national strikes where results, even before the national action, were depressed by the declining industrial relations climate – hence, Royal Mail’s application for relief for the whole of the period between 3rd September and 2nd December 2007 for scheduled services.

1.9 The financial impact of the adjustments being sought by this application

The estimated financial relief being sought for the IA encountered in the Formula Year, as a result of the adjustments sought to recorded quality of service, is set out in Table 1.6 below.

Table 1.6 Summary of financial consequences and relief sought:

Without Relief With Relief

C-factor standards and measures

Retail 1st Class £43.0m £0.0m

Retail 2nd Class £12.7m £0.0m

Standard Parcels £0.0m £0.0m

European International Outbound £0.0m £0.0m

Postcode Area target% £12.6m £12.6m

%of collection points served each day £12.6m £0.0m

%of delivery routes completed each day £12.6m £0.0m

Total C-Factor £93.6m £12.6m

Compensation standards and measures

Bulk 1 £40.0m £0.0m

Bulk 2 £39.2m £0.0m

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Bulk 3 £0.0m £0.0m

Total Compensation £79.2m £0.0m

These figures are based on current 2007/08 revenue forecasts – which are subject to final confirmation by the end of July. The methodology for calculating C-factor and Bulk Mail Compensation is summarised at Annex 10.

In total, for the combined impact of the IA and the worsening industrial relations climate, Royal Mail is seeking relief for an estimated £79.2m in compensation otherwise directly payable to bulk mail customers and £81.0m in C-Factor adjustment.

1.10 Settlement of the dispute

After weeks of industrial dispute (as explained later in this document), the CWU and Royal Mail reached an agreement, which was endorsed by the CWU Executive Committee on 22nd October. The Agreement with the CWU, a joint statement on pension consultation and a national joint statement on restoring good industrial and employee relations are attached at Annex 11.

The final agreement is in four sections, outlining:

• Employee pay, benefits and job security

• The phased approach to delivering change and flexibility

• The efficiency agreement, and

• The Network 2007 Deployment Agreement.

The settlement, endorsed by the CWU membership on 27th November, also included a joint statement between Royal Mail and the CWU on pension consultation, which enabled the commencement of a formal consultation on changes to the pension schemes in late October 2007.

Alongside the national agreement, a joint statement between Royal Mail and the CWU on restoring good industrial and employee relations was published, which made reference to the potential of the dispute to damage relationships between managers, union representatives and employees and stated that managers and CWU representatives would meet urgently "to calm situations down and find sensible solutions to any local issues" and that the workforce needed to work together "in a positive way" "to bring about a fresh start". The need for this statement to be issued (and the timing of it) demonstrates how poor the climate of industrial relations was and how much needed to be done to restore it to its pre-IA state.

The settlement with the CWU therefore covered the various aspects of transformation of the business and allows the company to go forward in modernising and transforming its Letters business, although it has been unable to solve instantly the problem of extremely poor industrial relations, which, understandably, will take longer to resolve.

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2. CHAPTER 2: SCOPE OF INDUSTRIAL ACTION AND IMPACT ON SERVICES

2.1 Introduction

In the first wave of IA, the CWU called upon Royal Mail’s operational employees to take a total of 4 days of national IA in relation to “Pay Conditions and Royal Mail’s Business Plan”.

This was made up of two one-day national strikes (29th/30th June and 12th/13th July) during which Royal Mail’s entire collection, processing, network and delivery operations were effectively shut down for a period of 24 hours on each of the 4 occasions.

Following the two 24 hour strikes, the CWU changed tactics and developed an approach involving a series of rolling strikes, whereby employees working in separate components of the pipeline took action on different days. This approach deliberately maximised disruption to Royal Mail and its customers (whilst minimising the amount of time people were on strike and, hence lost earnings, for striking employees) as evidenced by these quotes from the CWU:

CWU Website, 18th July 2007: “The Postal Executive has today agreed to escalate the dispute on all fronts – industrial, political activity and how we get our message across to the public and business community…

We have agreed a rolling programme of strikes that means Royal Mail will face two weeks of functional/site specific strikes resulting in 2 weeks of continuous disruption to mail services.

This is designed to hit Royal Mail harder at minimum cost to our members”

Billy Hayes, CWU General Secretary, Letter to Branches, 18th July 2007: “This programme of action has been designed to have the maximum impact on the business without increasing further loss of pay to our members. If carried out as planned it should cause a major disruption to the service throughout the three week period and fresh negotiations with the employer.”

This form of action recognises the importance of connectivity in Royal Mail’s pipeline, particularly for mail requiring next day delivery. Put simply, ‘taking out’ one component of the pipeline significantly reduces the effectiveness of the remaining components of the pipeline. And whilst these rolling strikes disrupted Royal Mail services for almost a month, employees lost only two days pay each to IA during that period.

In addition, during this time Royal Mail also encountered regional IA, linked to transformation activity, in various parts of the country. Performance was also affected by two separate incidents outside Royal Mail’s control:

• flooding in the Sheffield/Hull area (in June)

• flooding in the South West and South East of England and West Midlands (July).

On 9th August 2007, Royal Mail and the CWU issued a joint statement on a ‘period of calm’ in which both parties committed to talks on all the issues between them, hosted and facilitated by the TUC

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and supported by ACAS – with a view to reaching an agreement by 4th September. It was agreed that during the period of calm Royal Mail would not serve notice or take any unilateral action to impose transformational changes by executive action and the CWU would suspend IA – most notably suspending a second tranche of rolling IA planned to commence on Friday 10th August and end on Friday 17th August. However, it should be noted that due to the late conclusion, a small number of employees were not aware that the strike on 10th August had been cancelled and hence did not turn up for work.

This period of calm was effective in significantly reducing the level of IA until early September. However, as no resolution had been reached, the general industrial relations climate continued to be poor and sick absence remained high. Royal Mail front line operational managers continued to be stretched during this period – trying to rebuild positive working relationships with employees, finding alternative resource to cover sick absence, keeping employees briefed on progress and planning for deployment of future transformation activity in anticipation of a national agreement being reached. These factors meant that Royal Mail performance was not as high as we would normally expect at that time of year.

Disappointingly, a resolution was not reached by 4th September and the period of calm was extended until 9th September when, despite the best efforts of the negotiating team, it became clear that a settlement would not be reached at that point and talks broke down.

At this point, Royal Mail had no alternative but to commence deployment of the planned Network 2007 changes by executive action (i.e. without a national enabling agreement with the CWU) in order to ensure Royal Mail’s compliance with new EC restrictions on driving speeds for 7.5t tonne vehicles, which became law in January 2008. Royal Mail accordingly served employees with notice of planned changes to their duty structures.

Royal Mail had planned to deploy these changes in the summer of 2007 via a national agreement and with a positive industrial relations climate. However, having delayed deployment in the hope of achieving a national agreement, Royal Mail had no option but to proceed with these changes, so that they were fully embedded in advance of the busy Christmas period.

Whilst this deployment came about as a result of EC legislation, Royal Mail employees and the CWU were aware that Network 2007 deployment was part of the overall package of transformation measures.

The collapse of the negotiations, combined with deployment of Network 2007, the announcement that Sunday collections would cease from Sunday 28th October and the continuation of briefing on Royal Mail’s pension reforms triggered a further decline in industrial relations. The level of work to rule and go-slow activity increased considerably and this ultimately led to another round of national strikes on 5th & 6th and 8th and 9th October:

CWU Letter to Branches, 20th September 2007: “In response to Royal Mail declaring executive action on a number of fronts, the Union has made a decision to escalate strike action…..

…In the last week the company has announced the following:

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• Executive action on their pension proposals – Royal Mail will be communicating this to staff next week.

• Executive action through imposition of later starts on the 8th October.

• Executive action through the imposition of network changes on the 23rd October.

• Executive action through the cessation of Sunday Collections on the 28th October.

• Executive action against Engineers, the net effect of which will mean a reduction of 10% of posts.

• Executive action through the cessation of Employee Share of Savings Scheme (ESOS) on the 10th October.”

Overall, the periods during and after the IA were a particularly challenging time for Royal Mail, especially for the front line operational managers who led our people through one of the most difficult industrial relations climates in Royal Mail history - many of these managers working 10 hour days, 7 days per week and postponing their holiday to keep the operation running.

A day by day diary of key incidents and events is shown at Annex 4 and the remainder of this chapter provides a more detailed explanation of the issues/events that affected Royal Mail performance during the Formula Year, namely:

• The first 24 hour national strike

• The second 24 hour national strike

• The rolling national strikes in July/August

• The two 48 hour national strikes in October

• The most significant incidents of regional IA

• The adverse weather and other disruptions to service

• The ongoing decline in the general industrial relations climate

• The very low staff morale.

2.2 Overview of Royal Mail's pipeline

Royal Mail’s pipeline is complex, and an individual item of mail will go through many different processes on its journey from collection to delivery (an illustration of the journey of a letter is shown at Annex 12).

The key components are described in Table 2.1 below:

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Table 2.1 Overview of Royal Mail Pipeline

Collection

Royal Mail collects mail that customers have posted in c.116,000 post boxes and via c.14,600 Post Office outlets. Royal Mail also collects mail from over 87,000 business premises each day. Royal Mail makes multiple collections from many boxes. This process happens from 9am until 7pm – depending on the location.

Outward Processing

Once collected, mail is brought into our 69 Mail Centres for outward processing. At this stage:

• Stamps are cancelled • 1st and 2nd class items are segregated • Mail is sorted (either manually or by machine, depending on item size or

address readability) to its next Mail Centre destination. For 1st Class mail this process starts mid afternoon (as early collection mail arrives at the Mail Centre). The peak 1st class processing time is 7pm until 10pm – depending on Mail Centre location.

Network Once mail is outward sorted it is passed to the Network. Royal Mail uses a combination of air, road, sea and rail services to move mail around the UK. For 1st Class mail, the peak Network operation takes place from between 10pm and 2am (although more remote Mail Centres will receive mail later).

Inward Processing Once networked, mail is brought back into our 69 Mail Centres where a ‘finer’ sortation is carried out. At this stage, mail is sorted, as a minimum, to individual Delivery Offices. However, a large proportion of mail is sorted by machine to the individual postman/woman’s delivery route. This process should be complete by 6.30am

Local Distribution This process involves moving mail from Mail Centres to the Delivery Offices it serves. A number of local distribution waves take place during the night/early morning.

Delivery Mail then reaches one of our c.1400 Delivery Offices or c.1,000 Scale Payment Delivery Offices11. Mail is then sorted to each of our 68,000 delivery routes, where the delivery officer then sorts his/her mail into the order in which s/he will deliver it12. Mail is then delivered to each of the 27m address points in the UK.

11 Scale Payment Delivery Offices are rural delivery services which are subcontracted to Post Office Ltd – allowing Royal Mail Group to make more effective use of its infrastructure.

12 This is a particularly labour intensive process. Royal Mail is testing the use of Walk Sequencing technology, as part of its Transformational Change programme, which will allow this part of the operation to be carried out by machine.

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2.3 National strikes – linked to transformation activity

Discussions around “transformation” really started during the last price control negotiations with Postcomm and its advisors, LECG. Between December 2004 and September 2005, discussions took place with Postcomm and Government about Royal Mail’s plans for transformation. This culminated in Royal Mail submitting to Postcomm in September 2005 the Royal Mail Integrated Operational Plan, which set out the individual initiatives underpinning the strategy. This document was key to the 2006 price control settlement.

In May 2007, a presentation to Royal Mail Letters’ Senior Managers described the Royal Mail Letters Plan, which focuses on its aims to:

• Maximise profitable revenue

• Become the lowest cost operator with the best quality of service

• Achieve world class productivity through investment in the business, and

• Have engaged, flexible people working in the business.

The presentation made clear that all of these aims can only be achieved by major transformation of the business.

In February 2007, Royal Mail Directors commenced the annual pay negotiation, reinforcing the compelling need for transformational change to CWU executives in the context of the changing commercial environment and increased competitive threat. This followed considerable discussions the previous year during the negotiation with government of the loan. Royal Mail made clear that pay increases could only be funded through modernisation and improved efficiency and would therefore be conditionally linked to deployment of transformational change, which would create the necessary flexibility required to meet the challenges of an increasingly competitive market place. As the quotes shown at section 1.2 demonstrate, the CWU was seeking to make its and its members’ agreement to transformation ( or “modernisation”) conditional upon immediate pay increases and improvements in terms and conditions.

Whilst early negotiations focussed on pay, it quickly became clear that the CWU’s core opposition lay in the linkage between pay and Royal Mail’s strategic activities relating to major transformational change – as evidenced in the following quotes:

“We are in negotiation with Royal Mail over pay and the future direction of the company.” Dave Ward, CWU Deputy General Secretary (Postal), CWU Letter to Members, 20th April 2007.

“The ballot has been called in response to a 2.5% pay offer and the implementation of £350 million of cuts in work places. In addition the ballot has been called to oppose Royal Mail’s business plan that includes £1.5 billion cuts over the next 5 years.” CWU Website, 22nd May 2007

“You are facing £350 million cuts this year and the imposition of major change in your workplace – even before the introduction of automation. Royal Mail’s business plan means

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a further £1.2 billion of cuts over the next 5 years.” CWU full page advert, The Independent, 25th May 2007.

“Postal workers have rejected the company’s arguments – reject their plans for the future – and delivered overwhelming votes in support of their union.

The key issue in this dispute remains the unacceptable cuts in postal services – cuts in postal jobs – attacks on our members’ terms and conditions…..

….Royal Mail’s plans include 40,000 job losses – later deliveries – reductions in collections – reductions in weekend services. The closure of delivery offices and mail centres – and the destruction of the rural and crown post office network.” CWU Website, 7th June 2007

“The fresh wave of strikes is against the background of Royal Mail confirming the first stage of their so called modernisation plans will be imposed on a large section of the workforce on the 13th August. This involves significant network changes, later delivery start times and permanent reductions in customer services.” Billy Hayes, CWU General Secretary, Letter to Branches, 2nd August 2007.

Pension reform is central to transformation of Royal Mail and impacts on every employee. During this period Royal Mail was discussing the need for pension reform with the CWU and others and was developing plans for new remuneration schemes, such as Colleague Shares, which strengthen the link between business performance and individual reward – both of which were at that time opposed by the CWU.

The ballot issued by the CWU for the national IA refers to “Pay Conditions and Royal Mail’s Business Plan”. There is not a document entitled “Royal Mail’s Business Plan”. However, from the sequence of events and discussions that took place it is clear to Royal Mail that the industrial dispute related to Royal Mail’s plans for the change, modernisation or transformation of the business. In particular, Royal Mail presented to the CWU the aims of the business and some detail around what transformation means in practice, at a strategic involvement meeting in March 2007 – which aims seems to have been referred to by both the CWU and Royal Mail as Royal Mail’s “Business Plan”.

The CWU issued a Letter to Members on 20th April 2007 (see Annex 13) in which it included “Royal Mail’s Shopping List of Savings”. This is a list of points which had been discussed with the CWU as an illustration of transformational activities.

2.4 The first 24 hour national strike on 29th/30th June

This IA affected all UK operations, i.e. all 121 postcode areas and all parts of the pipeline. The action included the whole of any attendance or shift that began at or after 0300hrs on Friday 29th June and before 0300hrs on Saturday 30th June.

Annex 14 provides a simple illustration of how Royal Mail’s first and second class pipelines were immediately affected by this dispute. The table below demonstrates how 1st Class items posted on Thursday 28th June and Friday 29th June were most severely affected by this strike: most obviously,

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almost no delivery or collection service could be provided on the days of the IA itself as the take up of the call to IA by CWU members was significant.

The action additionally caused a backlog of mail that was already in the system and could not be processed and further disruption was encountered as Royal Mail endeavoured to clear that backlog of mail on a first in, first out principle (see Chapter 3 for more details on Royal Mail’s contingency and recovery operation).

Table 2.2 1st Class Products:

Items posted on…

Due for delivery on…

Were delayed at… First opportunity to…

Thu 28th June Fri 29th June delivery on Fri 29th June

deliver was on Sat 30th June

Fri 29th June Sat 30th June collection on Fri 29th June

collect was on Sat 30th June13.

Second class products are due to be delivered by no more than three working days after posting. Therefore, second class items posted on Tuesday 26th to Friday 29th June were most severely affected by this IA..

To provide some sense of scale to the impact of this IA, the table below provides a summary of the average volume of mail processed in the three weeks prior to this strike:

Table 2.3 Average volume of mail processed in weeks commencing 4th, 11th and 18th June 2007

Volume (m items) Mon Tue Wed Thu Fri Weekend Total

1st Class Non-presort 20.1 18.8 18.1 18.2 18.3 4.5 98.0

2nd Class Non-presort 17.3 16.9 17.1 168 17.5 4.7 90.4

1st Class presort 2.2 1.9 2.4 2.2 1.9 0.2 10.8

2nd Class presort 10.8 7.7 7.2 7.0 10.8 0.7 44.2

Mailsort 3 20.5 13.0 12.7 14.0 14.0 0.1 74.2

Total 70.9 58.4 57.5 58.3 62.4 10.2 317.6

13 However, Royal Mail does not have full processing and network capability over the weekend (as weekend volumes are relatively low). So some of these items could not be processed and/or trunked until Mon 2nd July – for delivery Tue 3rd July.

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In the three weeks prior to this strike, Royal Mail handled an average of 318m items per week. It is reasonable to assume that:

• The 18.2m 1st Class non-presort and 2.2m 1st Class presort typically posted on Thursday would be directly affected by this strike.

• The total 62.4m typically posted on Friday would be directly affected by this strike.

• Many of the 2nd Class and Mailsort 3 items posted in advance of Thursday 28th would be directly affected.

• Mail posted from Saturday 30th onwards would be heavily affected as it joined the backlog of mail caused by the strike.

2.5 The second 24 hour national strike: 12th/13th July

This second national strike affected all UK operations, i.e. all 121 postcode areas and all parts of the pipeline. The action included the whole of any attendance or shift that began at or after 1900hrs on Thursday 12th July and before 1900hrs on Friday 13th July.

Annex 15 provides a simple illustration of how Royal Mail’s first and second class pipelines were immediately affected by this IA. The table below demonstrates how 1st Class items posted on Thursday 12th July and Friday 13th July were most severely affected by this strike (although, as explained above, further disruption was encountered as Royal Mail endeavoured to clear the backlog of mail).

Table 2.4 1st Class Products:

Items posted on…

Due for delivery on…

Were delayed at… First opportunity to…

Thu 12th July Fri 13th July network on Thu 12th July

travel on network Friday 12th July for delivery on Saturday 14th July

Fri 13th July Sat 14th July collection on Friday 13th July

collect was on Sat 14th July.14

Second class products are due to be delivered within three working days after posting. Therefore, for second class products, items posted on Tuesday 10th to Friday 13th July were most severely affected by this IA.

Volumes of mail affected were similar to those affected for the first national strike, i.e. as shown for weeks commencing 4th, 11th and 18th June (Table 2.3).

14 Royal Mail does not have full processing and network capability over the weekend (as weekend volumes are very low). So some of these items could not be processed and/or networked until Mon 16th July – for delivery Tue 17th July.

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2.6 Rolling strikes from 25th July to 8th August

As stated previously, to maximise disruption to Royal Mail and its customers and to minimise the lost earnings due to IA for each employee, the CWU called a series of rolling strikes which affected separate parts of the Royal Mail pipeline on different days. These are summarised in Annex 16.

The complexity of Royal Mail’s pipeline has been explained previously:

• If all of Royal Mail processes are disrupted in a 24 hour period (as in the two one-day national strikes discussed previously) then we can expect mail to be delayed by at least 24 hours.

• However, if just one of these processes is disrupted there is a high probability that mail will also be delayed by at least 24 hours. Hence, taking out one part of the pipeline on a particular day can have just as significant an impact on performance against quality of service as taking out the entire pipeline.

• If all key processes are disrupted over a rolling period of days/weeks then the impact on quality of service standards is devastating as backlogs of mail build up across the pipeline.

The table below provides a summary of the rolling IA dates and a brief description of how each strike impacted on the pipeline.

Note: in this table ”standardised measures” refers only to the Licence requirement to provide one delivery to every delivery point and one collection from each collection point per day (Monday – Saturday)15.

Table 2.5 Details of Rolling Industrial Action

Industrial Action Key Impact on Service (scheduled service and Standardised Measures)

Mail Centres and Cash Handling:

(1) Commencing at or after 19.00 Wednesday 25th July 2007 until 19.00 Thursday 26th July 2007

(2) Commencing at or after 03.00 Tuesday 31st July 2007 until 03.00 Wednesday 1st August 2007.

Mail Centre strikes also impacted on Collection Hubs and Delivery Offices that are co-located on the Mail Centre site. So collection, delivery and processing are all affected on these days – resulting in significant quality of service failures for scheduled services and standardised measures.

Manual Data Entry Centres (MDECs)

(1) Commencing at or after 12 noon Thursday

MDECs are responsible for assigning a postcode to mail pieces where the address on that item is illegible to our automated sorting equipment.

15 Standardised Measures 10 and 11 under the Annex to Condition 4 of Royal Mail’s Licence.

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26th July 2007 until 12 noon Friday 27th July 2007.

(2) Commencing at or after 03.00 Saturday 4th August 2007 until 03.00 Sunday 5th August 2007.

Industrial action on MDEC has potentially the smallest impact on quality of service as items that can not be sorted by machine will be forwarded to manual sortation. No direct impact on collection and delivery standardised measures.

International/Heathrow Worldwide Distribution Centre (HWDC)

(1) Commencing at or after 12 noon Friday 27th July 2007 until 12 noon Saturday 28th July 2007

(2) Commencing at or after 19.00 Monday 6th August 2007 until 19.00 Tuesday 7th August 2007

Whilst industrial action in International operations in Mail Centres and in Heathrow Worldwide Distribution Centre has no direct impact on quality of service for domestic services or on the standardised measures, the impact on International quality is significant.

Deliveries and Separate Collection Hubs:

(1) Commencing at or after 19.00 Friday 27th July 2007 until 19.00 Saturday 28th July 2007

(2) Commencing at or after 03.00 Thursday 2nd August 2007 until 03.00 Friday 3rd August 2007

The majority of Deliveries and Collections are carried out from units that are independent of the Mail Centre. Industrial Action in these units has the greatest impact on quality of service for scheduled services and standardised measures performance, e.g. if collections are not completed then every item posted on the strike days fails service.

Airports

(1) Commencing at or after 12 noon Monday 30th July 2007 until 12 noon Tuesday 31st July 2007.

(2) Commencing at or after 19.00 Friday 3rd August 2007 until 19.00 Saturday 4th August 2007

Loss of air services affects quality of service for Special Delivery mail and distant mail. Approximately 11% of all 1st Class mail travels via an airport. No direct impact on collection and delivery standardised measures.

Network:

(1) Commencing at or after 03.00 Wednesday 1st August 2007 until 03.00 Thursday 2nd August 2007.

(2) Commencing at or after 12 noon Tuesday 7th August 2007 until 12 noon Wednesday 8th August 2007

Loss of the network (road bound services and cross docking in network hubs) affects all neighbouring and distant mail (more than three quarters of all mail).

Network strikes also impact on employees in Regional Distribution Centres (who are responsible for the collection and bag sortation of Mailsort and Presstream mailings). So these products are doubly affected on days with network industrial

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action.

No direct impact on collection and delivery standardised measures.

A simplified table is provided at Annex 16 illustrating the extent of the rolling IA, day by day, on Royal Mail’s pipeline. This diagram clearly illustrates that during the 15 day rolling strike period a total of 12 days were directly affected by some form of national IA.

The complexity of this rolling IA should not be underestimated. For each of the strikes listed above, the CWU were legally obliged to provide notification of which units and how many employees were to take action on the specified day. These documents often ran to 300 pages and caused considerable confusion – not only for Royal Mail managers but also for CWU representatives who, on a number of occasions, instructed their unit to take action on the wrong day.

During this three week period Royal Mail handled around 105m 1st Class, 125m 2nd class and 62m Mailsort 3 items per week – as summarised in the table below - and a significant proportion of these items were either directly or indirectly delayed as a result of the IA.

Table 2.6 Breakdown of (estimated) processed traffic weeks commencing 23rd July, 30th July and 6th August:

Volume (m items) W/C 23rd July W/C 30th July W/C 6th August

1st Class Non-presort 90.1 93.0 92.3

2nd Class Non-presort 78.5 82.1 84.2

1st Class presort 7.7 7.8 8.0

2nd Class presort 43.5 35.8 33.4

Mailsort 3 60.7 63.7 62.0

Totals 280.5 282.4 279.8

2.7 The two 48 hour strikes on 4th- 6th and 8th-10th October

These national strikes affected all UK operations, i.e. all 121 postcode areas and all parts of the pipeline. The first action included the whole of any attendance or shift that began at or after midday on Thursday 4th October and before midday on Saturday 6th October. The second action included the whole of any attendance or shift that began at or after 0300 hours on Monday 8th October and before 0300 hours on Wednesday 10th October.

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Once again, these strikes were deliberately designed to maximise disruption to Royal Mail and its customers. A CWU official is quoted in the Financial Times (21 September 2007) as saying that the two 48-hour 'back-to-back' strikes would mean no deliveries for five days. Whilst there was a break between these two strikes, the break was over the weekend when only a small proportion of Royal Mail employees are scheduled to work – thus allowing little opportunity for any clearance of the backlog between the two strikes. This meant that Royal Mail and its customers in effect experienced almost a full week of lost service (from the stoppage of the collection operation on Thursday 4th October16 until the restart of the delivery operation on Wednesday 10th October).

Whilst Royal Mail lost 4 days to national IA from the IA in June, July and August and another 4 days due to the national IA in October, Royal Mail was able to recover service more quickly from the earlier strikes as there were ‘breaks’ between each of the incidents (even with the rolling strikes). The backlog created by what was effectively 6 consecutive days of national IA in October was significantly greater than the backlog created by the non-consecutive strikes earlier in the year17.

Annex 17 provides a simple illustration of how Royal Mail’s first class pipeline was immediately affected by this IA. The table below demonstrates how 1st Class items posted on Thursday 4th

October through to Tuesday 9th October were directly affected by this strike. However, given the scale of the action, many items posted in the days following the IA were also severely delayed – as Royal Mail attempted to process mail on a first in, first out basis.

Table 2.7 1st Class Products:

Items posted on…

Due for delivery on…

Were delayed at… First opportunity to…

Thu 4th October Fri 5th October Collections on Thu 4th October

Collect was on Saturday 6th October, but only for collection boxes emptied by duties scheduled to start after midday (which is the minority as most pillar boxes are scheduled to be emptied by duties that start before midday on a Saturday). Boxes scheduled to have a Sunday collection would have been emptied on Sunday 7th October (again, a very small proportion). For all other boxes, business customers and Post Office Ltd collection, the next available opportunity for a collection was Wednesday 10th October. So the first

16 In fact, as the industrial action started at midday, Royal Mail experienced some delivery employees ‘cutting-off’ their duty at midday when they shouldn’t have – as the ‘delivery’ component of the strike was not due to start until the following morning. This led to part walk failures on 4th October.

17 Other factors affected the length of the recovery period in relation to the October strikes and these are explained later in this chapter.

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opportunity for delivery was Thursday 11th October at the earliest – at least one week after the strike commenced.

Fri 5th October Sat 6th October collection on Friday 5th October

As above – majority of items delayed by a minimum of 5 days.

Saturday 6th October

Monday 7th October Collection on Saturday 6th October

As above – majority of items delayed by a minimum of 4 days.

Sunday 7th October

Monday 8th October (if posted in an advertised Sunday Collection box) or Tuesday 9th October

Delivery on Monday 8th October (if item was posted in an advertised Sunday collection box)

Or Collection on Monday 8th October

The small number of items posted in an advertised Sunday collection should have been collected on Sunday 7th October with the first opportunity to deliver on Wednesday 10th October. If item was posted in any other box then the first opportunity to collect was on Wednesday 10th October, for delivery on Thursday 11th October at the earliest.

Monday 8th October

Tuesday 9th October

Collection on Monday 8th October

Collect on Wednesday 10th October, for delivery on Thursday 11th October at the earliest. So items delayed by a minimum of 2 days.

Tuesday 9th October

Wednesday 10th October

Collection on Tuesday 10th October

As above. Items delayed by at least 1 day.

Second class products are due to be delivered within three working days after posting. Therefore, for second class products, items posted on Tuesday 2nd through to Tuesday 9th were directly affected – with many other items held up in the backlog.

It is important to note that as there were virtually no collections made between Thursday 4th and Tuesday 9th October (inclusive), all mail that was posted during this period was mixed in pillar boxes or at customer premises and therefore impossible to process in posting date order.

Traffic volumes were also significantly higher in the Autumn than they were during the strikes in the summer months. This combined with the ensuing local IA in large pockets of the country such as London and Liverpool where workers continued their action, which was already on its seventh day – (see Annex 32 PA News item, 17 October 2007 "Wildcat postal strikes continue") and escalation of go-slow and work to rule activity, severely hindered Royal Mail’s attempts to clear the backlog.

It is impossible to tell exactly how much mail was affected by this IA as some customers changed their posting behaviours to avoid the strike, and some customers switched to Royal Mail’s

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competitors or electronic substitution. Also, the backlog of mail had built up in pillar boxes, business premises and Post Office outlets, so it was impossible to calculate how much of the backlog had been posted on each day.

However, to illustrate the scale of impact, Table 2.8 below shows the average posting volumes by day of week for the 2 weeks prior to these strikes:

Table 2.8 Typical posting volumes, by day of week, for the 2 weeks prior to the October 2007 Industrial Action

Volume (m items)

1st Class Non-presort

2nd Class Non-presort

1st Class presort

2nd Class presort

Mail-sort 3

Total

Thu 20th Sep 17.2 16.3 2.4 8.2 15.9 60.0

Fri 21st Sep 17.5 16.3 2.3 8.8 15.4 60.3

Sat 22nd Sep 2.6 3.0 0.3 0.4 0.0 6.4

Sun 23rd Sep 2.1 1.8 0.0 0.0 0.0 3.9

Mon 24th Sep 19.4 16.3 2.2 10.0 19.5 67.4

Tue 25th Sep 18.5 16.5 2.1 9.0 16.4 62.4

Wed 26th Sep 17.6 17.0 2.6 10.2 14.1 61.5

Thu 27th Sep 17.9 16.5 2.0 5.5 11.2 53.1

Fri 28th Sep 17.7 17.7 2.3 10.1 16.5 64.3

Sat 29th Sep 2.4 3.1 0.1 0.2 0.0 5.8

Sun 30th Sep 2.2 1.9 0.0 0.0 0.0 4.1

Mon 1st Oct 20.7 18.4 2.0 9.3 21.4 71.8

Tue 2nd Oct 20.1 18.1 1.8 8.6 15.1 63.7

Wed 3rd Oct 20.5 17.9 2.6 11.4 17.9 70.3

From these figures it is reasonable to assume that in the national strike period from Thursday 4th to Wednesday 10th October, a total of around 325-330m items would have been directly affected (much higher than the volumes affected during the individual incidents of IA in June, July and August).

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This created a significant backlog of work – and new challenges for Royal Mail in terms of mail storage and protection (see Chapter 3 for more details of Royal Mail’s contingency and recovery arrangements).

2.8 Regional industrial action linked to transformation activity

During the Formula Year a number of regional strikes took place as a result of Royal Mail planning and/or deploying transformational change at local level, as well as disputes linked to the main IA (see also section 2.9 below). These are summarised in Annex 6 which sets out a full list of local disputes during from early June to 2nd December (including those that were not related to transformation activity and for which relief is accordingly not being sought).

Each Royal Mail Area is responsible for local implementation of the overall Royal Mail Letters strategy and plan. These transformation activities include steps such as changes to duty structures which affect the mix of full time and part time duties and duty start/finish times – reflecting the Royal Mail Letters plan to have “engaged, flexible and competitively paid people” in order to achieve the necessary transformation of the business.

The quote below demonstrates the CWU opposition to these local changes:

“It has become clear that whilst national negotiations have been continuing some Royal Mail managers have put forward proposals to introduce local efficiency agreements. We have informed Royal Mail that this is completely unacceptable and will inevitably bring about conflict.

It is now essential that all CWU Branches and local representatives support the position agreed by the National Executive of non cooperation at local level on efficiency/budget savings and changes to attendance times until such time as a National Agreement has been reached.” Dave Ward, Deputy General Secretary (Postal), CWU Royal Mail Pay Bulletin No. 1.

We have set out at Annex 6 each event, the reasons for the dispute, how each relates to transformation activity and whether an adjustment is being sought to the quality of service results, as part of this application.

2.9 Regional industrial action – overview of impact on quality of service

Regional IA at particular Delivery Offices or Mail Centres effectively closed down all or part of offices for the days that the action occurred and continued (as detailed in Annex 6), thus making delivery, processing and collections unachievable. Such regional action was dealt with in line with the local contingency plans – taking guidance from Royal Mail’s corporate priorities. These regional actions had a serious impact on local services but in some cases where the impact on measured national quality of service for the scheduled services is negligible or difficult to quantify, then they have not

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been directly18 included in the adjustments which Royal Mail is claiming to the quality of service performance results.

Regional IA does have an immediate bearing on Royal Mail’s ability to meet the collection and delivery standardised measures: on each day that a delivery office or mail centre is closed because of IA, the licence standard for 99.90% of all collection points and of all delivery routes to be served / completed each day cannot be achieved.

Where the office is not completely closed, there may still be an effect on Royal Mail’s ability to meet these targets as staff are not available to carry out these duties. Royal Mail is therefore seeking adjustments to the recorded results of those measures to exclude the collection routes and/or delivery points affected by regional action on the affected days (see section 1.7.2 for details).

The most significant incidents of localised IA during the summer period were in Oxford and West of Scotland (including related incidents in parts of England) and during the autumn period were in Cheshire and Merseyside (mainly Liverpool), East and North London and South London. All of these were directly related to transformation activities.

Oxford

During the national strikes two employees in Oxford were disciplined for bullying and harassment of a sub-postmistress and a number of operational staff who had taken the decision to come to work on a national strike day. This alleged incident happened in the presence of Royal Mail customers. The action in Oxford Mail Centre from Monday 16th until Sunday 22nd July was a direct response to application of Royal Mail’s conduct code during the main strikes called by the CWU – clearly this incident and the subsequent application of conduct code procedures would not have taken place had the national IA on “Pay Conditions and Royal Mail Business Plan” not happened. This dispute hindered Oxford’s efforts to clear the backlog of mail caused by the national IA.

West of Scotland (extending to Liverpool etc)

On Monday 30th/Tuesday 31st July drivers from Glasgow Mail Centre refused to cross the picket line at Edinburgh Airport – which was taking part in its notified strike over the ‘Pay Conditions and Royal Mail Business Plan’. On return to Glasgow Mail Centre the drivers were disciplined for refusing to carry out their duties as directed and wilfully delaying mail. This resulted in wildcat action which quickly spread to a number of units throughout Scotland (e.g. Glasgow Mail Centre, Scottish Distribution Centre and many Delivery Offices in the West of Scotland) in sympathy with the drivers who had been disciplined. Clearly, this incident would not have occurred if the main IA on ‘Pay Conditions and Royal Mail Business Plan’ had not been taking place at Edinburgh Airport.

By 1st August, the action had spread further to include Aberdeen, Edinburgh, Tyneside and Liverpool Mail Centres (including Liverpool City Delivery Office which is based in Liverpool Mail Centre). This action ended on 2nd August.

18 However, they may have been indirectly claimed for if they occurred during the wider period of national industrial action and recovery for which Royal Mail is seeking relief.

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This IA illustrates the volatility of the industrial relations climate during the Formula Year and how quickly a localised dispute can spread to other units. Throughout such periods Royal Mail, when making operational decisions, must balance the risk of escalation of IA (and further inconveniencing customers) against the benefits of tactical interventions which may accelerate clearance of mail backlogs.

It is impossible to tell how many items were delayed as the incidents coincided with rolling national action in Mail Centres and Delivery Offices at that time and because some mail was diverted to other sites. Clearly the wildcat action added further delay to clearing the backlogs of mail that had built up from the main strikes the previous week.

As both the Oxford and Scotland incidents occurred during the national recovery period which applies to the adjustment of the scheduled service results, they are not separately or additionally included for these measures. However, because they occurred outside the days for which we are seeking national adjustment of the standardised measures (Collection and Delivery) they are separately detailed for these measures.

Cheshire and Merseyside (mainly Liverpool):

Throughout the ballot period for the main IA CWU representatives in Liverpool led a rigorous campaign for support of the strike. During this period the normal level of employee cooperation was at stretch point within many of the major delivery units in the area.

For example, there reached a point where the majority of frontline employees withdrew their usual willingness to use private cars on delivery19 – placing pressure on the existing resources within delivery units and forcing Royal Mail to hire additional vehicles and use managers to convey delivery postmen/women to the start of their duties.

Employees were also uncooperative in covering days off due to absence and extending their normal delivery duties on days when volumes peaked (as would be the norm). This type of work to rule activity had been sustained for several weeks before and after the main strike days – stretching managers in their attempts to protect quality of service performance.

Upon return from the national IA the industrial relations climate continued to be strained and typically the workforce (in particular the larger units including Liverpool Mail Centre) were less productive than had been the case prior to the strike and employees refused to support and coach casual/agency staff as they would normally. Another example was demonstrated in employee reluctance to cross picket lines at Liverpool Mail Centre on 24th, 25th and 26th September when Royal Mail Engineers were taking notified IA.

19 Royal Mail delivery employees on agreement with their line manager and subject to appropriate mail integrity checks, are allowed to use their private cars on their delivery. This arrangement has a number of benefits for the employee and employer. However, as part of the work to rule, some employees refused to use their private cars. Whilst they are perfectly within their rights to do so, this left Royal Mail with serious logistic problems which are difficult to resolve at short notice and hence result in disruption to customer service. In some units, Royal Mail took the proportionate response of permanently withdrawing the privilege of using private cars on delivery – so that customers would not suffer such disruption in the future.

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Following the return to work after the October national IA, Liverpool Mail Centre and Delivery units (Annex 6 lists each of the units involved) took further IA – continuing their protest against “Pay Conditions and Royal Mail Business Plan”. This action had almost 100% support from frontline employees. The industrial relations climate was particularly tense and picket lines manned all major sites within the Liverpool postcode area.

This action continued until Friday 19th October20 - resulting in over two weeks of continuous industrial action in the area. Clearly, this compounded the backlog of mail already created by the notified strikes. A summary of the actions taken by the Cheshire & Merseyside management team to mitigate the effects of the IA and clear the backlog is provided at Chapter 3.

East & North London:

In addition to the 4 days of national IA in October, East & North London Area encountered:

• High levels of go-slow and work to rule activity

• A further 24 hours of notified (local) IA

• Continued wildcat IA following the 4 day national dispute

During the periods of IA the local CWU actively lobbied members not to take up available overtime to cover absent duties and to carry out other work to rule activities under the banner of the CWUs “Doing Your Job Properly” campaign – see Section 2.11 for more details of this campaign. The area’s problems were also exacerbated by higher than normal levels of sick absence.

On 14th August the CWU gave notification of a strike ballot in East and North London Delivery Offices in relation to “Unagreed changes to duty arrangements”. The root cause of this ballot was Royal Mail’s plans to change delivery duty start times, introduce greater resourcing flexibility through the introduction of more part time employees and to eliminate restrictive practices where employees are paid significantly more overtime than the hours they actually worked on overtime – all key components of Royal Mail’s transformational plans to ensure all our people’s paid work hours are utilised and balancing manpower plans to align with workload profiles.

After a vote in favour of IA, two 24 hour strikes were planned for all Delivery Offices in the North London (N), North West London (NW) and East London (E) postcode areas on Friday 28th/Saturday 29th September and Sunday 30th September/Monday 1st October.

However, the CWU subsequently cancelled the second of these dates. So the IA took place from 1900 hours on Friday 28th until 1900 hours on Saturday 29th September – seriously impacting the area's ability to complete their collection and delivery operations on Saturday 29th September21.

20 Although some units did return to work before the 19th – See Annex 6 for details.

21 It is worth noting that it is more difficult to recruit casual/Agency and Royal Mail managerial volunteers on Saturdays – as many people have personal/family commitments on weekends.

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Following the return to work from the national IA on Wednesday 10th October, a number of units in East and North London – in protest that a resolution had not been found to the national dispute on ‘Pay Conditions and Royal Mail Business Plan’ – took further wildcat IA until Monday 15th October. Full details of the units who took action can be found in Annex 6. This compounded East & North London’s challenge to clear the backlog created by the 4 days of national action.

South London

South London also encountered a number of incidents of IA which were compounded by extensive work to rule and go-slow activity in the Area.

On 13th September Abbey Wood and Thamesmead Delivery Offices took part in an unofficial union meeting triggered by escalation of the CWU’s “Doing The Job Properly” campaign (See Annex 18) which was part of the CWU’s wider response to Royal Mail's proposed transformational changes. This meeting resulted in delivery duties over-running and part walk failures. To discourage such events happening in the future, the management team in these units decided to abate employees pay for the time taken by the unofficial meeting.

On 27th-29th September, Streatham Delivery Office took balloted IA in relation to the use of private cars on delivery, triggered by rigorous adherence to the CWU’s Doing The Job Properly campaign.

On 29th September, all collection and delivery units in South East London took balloted IA in relation to ‘unagreed duty changes’ – again in protest at the transformational changes planned to realign manpower plans to workload profiles.

On return to work from the national IA on Wednesday 10th October, the majority of units in South London (SE and SW postcode areas) continued to protest against lack of resolution to “Pay Conditions and Royal Mail Business Plan” and in sympathy with the main strike that had taken place in Streatham Delivery Offices. This took the form of unofficial action from 10th to 13th October (although Streatham Delivery Office remained out until 15th October). During this time, South London also encountered extensive go-slow and work to rule activities in Delivery Offices across the South East and South West London postcode areas (as part of the Doing The Job Properly campaign). This took the form of:

• Cut-offs in inward sortation and preparation – caused by slow working and refusal to work a few minutes longer to complete sortation (as they would normally)

• Cut-offs on delivery – again caused by slow working and refusal to work a few minutes longer to complete their route and by drivers not dropping off second pouches at the correct time

• Withdrawing use of private cars on delivery

• Refusal to pick up available overtime and hence cover any absent duties

• Poor take up of scheduled attendance

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• Refusing to carry out tasks that they had not been formally trained to do (despite the fact that individuals had carried out these tasks many times before)

• Refusal to move to other work areas to support colleagues with a greater queue of work

• Refusing to use new high capacity delivery trolleys

• Taking excessively long to weigh delivery pouches and carry out other administrative tasks (such as signing in/out of the office)

• Refusing to coach/support casual/agency staff (as they would normally)

• Significantly higher than average levels of sick absence (this peaked at 12% in Streatham Delivery office and was as high as 16% in other units in the Area).

This disruptive activity was largely contained in SW and SE delivery offices, with the Mail Centre employees largely continuing to work as normal (other than, of course, the days when they took IA). However, as backlogs of mail grew the Delivery Offices became congested and the Mail Centre found itself in a position where it could no longer forward work to Delivery Offices – creating a massive backlog of mail, which had been processed, but could not be forwarded on for delivery. At its peak, South London Mail Centre had 600 rigid stackable containers and 1500 Yorks22 of processed mail in storage – waiting to be forwarded to Delivery Offices.

2.10 Adverse weather and other Force Majeure Incidents

During the period affected by IA, Royal Mail performance was also impacted by two adverse weather incidents which seriously affected operations and the service provided to our customers. The evacuation of Stansted Airport due to a security alert also impacted on performance.

2.10.1 Flooding

The first relates to unprecedented rainfall and subsequent severe flooding of the Sheffield/Hull area on 24th/25th June – which resulted in the temporary closure of both Mail Centres and of key junctions of the M1 and M62. As these incidents took place before the first national strike on 29th June, a separate ”force majeure” claim has been submitted for quality of service performance for scheduled services and standardised measures.

The second incident relates to flash flooding in the South East of England, South West of England, West Midlands and Wales, resulting in motorway closures (M5, M4 and M1) on Friday 20th July and over 2 million 1st class items failing on the road network. Many drivers, who were delayed due to the motorway closures, had to divert to other sites or park up in service stations to ensure they took their rest breaks as required by law. This meant not only that many thousands of items were delayed and missed their connection points for onward processing and delivery but also that vehicles were in the wrong place to start the next shift, thus having a knock on effect on the service provision.

22 Wheeled containers used to convey mail.

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The ongoing flooding affected Royal Mail operations in the Birmingham, Hereford, Worcester, Gloucester, Chester, and Oxford postcode areas for a number of days after. The impact of this flooding was well publicised in the national media for some weeks after the event – particularly in the Gloucester Area where the local water and electricity supply was cut off for some days.

This flooding occurred during the period which Royal Mail was recovering from its second national strike (12th/13th July) – hindering Royal Mail’s recovery in these particular areas – and also coincided with the IA being taken by Oxford Mail Centre (as described above). The flooding also continued into the period of the rolling strikes. It is therefore impossible to accurately separate the quality of service failures that occurred as a result of the flooding from those that occurred as a result of the IA.

It is reasonable to assume that the impact of the flooding on national quality of service will be small in comparison to the surrounding IA. However, the ongoing flooding in these areas had a more significant impact on achievement of the standardised measures collection and delivery targets.

Given the difficulties of disaggregating the causes of ongoing disruption and recovery as between IA and flooding, Royal Mail considers that it is appropriate to include in this application these circumstances and not to submit a separate claim for the impact of this force majeure on quality of service performance for scheduled services (so as to avoid double recovery). However, as Royal Mail is only seeking exemption for strike days (plus the day immediately following for national strikes) for the collection and delivery standardised measures failures, it will separately claim, through the quarterly Force Majeure process, for any failures resulting from this flooding which occurred outside of the “strike days plus one” period.

2.10.2 Evacuation of Stansted Airport

On Wednesday 21st November a security alert resulted in severe disruption to Royal Mail services at Stansted Airport. A suspect package in an adjoining building was reported, leading to police bomb disposal experts being called to the scene. This resulted in the road to and from the Royal Mail unit at the airport being cordoned off – preventing access and egress for all Royal Mail vehicles.

In total, 1.5m 1st Class items were reported as failing on the air network as a result of this incident. Under normal circumstances, Royal Mail would have considered submitting this case as a Force Majeure for 1st Class quality of service performance23. As with the flooding in Gloucestershire and Oxfordshire, Royal Mail will not submit a separate claim for this incident as it is covered by the over-arching period for which Royal Mail is seeking relief from the IA and its associated recovery period.

2.11 Industrial relations climate

This chapter has described the specific incidents that occurred during the Formula Year. However, the effect of the general industrial relations climate, whilst very difficult to quantify, should not be underestimated.

23 This incident had no impact on the collection and delivery standardised measures.

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An industrial dispute affecting every part of the business, in connection with the whole strategic future of the group and extending over most of 2007, inevitably changed the whole nature of management/employee relations. The bitterness of the dispute – especially as it revived in September with the expiry of the period of calm – and the demands on managers on the frontline inevitably resulted in damage to Royal Mail's performance. There could be no question of "business as usual" in the context of the ongoing, unresolved dispute.

An indication as to the industrial relations climate at that time was reflected in media coverage (see Annex 32 Press Cuttings and Annex 33 Climate of Industrial Relations). For example:, “Wildcat strikes continued for a seventh day in Liverpool, causing further disruption to mail deliveries, because of a row over changes to shift time….Hundreds of postal workers who had been taking part in unofficial action at a depot near Wakefield in West Yorkshire returned to work this afternoon following an agreement with local management…Up to 300 staff at the Yorkshire Distribution Centre in Normanton walked out yesterday morning in an unofficial dispute over new shift patterns.”; PA NewsFile, 17th October 2007.

Royal Mail front line operational managers led the organisation through one of the most difficult industrial relations periods in decades. In advance of the strikes, these managers were at the forefront of the ‘hearts and minds’ communications campaign – actively explaining the need for modernisation and transformation and encouraging employees not to take IA – whilst developing contingency plans and liaising with customers in preparation for the strikes.

During the IA, these same managers were responsible for protecting Royal Mail property and assets, securing the integrity of mail, coaching and directing management volunteers, dealing with an increased level of customer enquiries, protecting employees that did decide to come to work, monitoring and challenging inappropriate behaviours on picket lines and providing continuity of service wherever possible.

During the strikes managers were being pulled from all over the country to support the areas with the greatest and most prolonged backlogs of mail, such as Liverpool and London. In addition, Royal Mail managers had to carry out collections and deliveries to minimise the impact on the universal service.

After each strike, managers faced the difficult challenge of welcoming back a workforce with low morale (which in some cases was hostile towards them) and motivating their teams to clear the backlogs of mail in the shortest possible time without additional levels of overtime.

In normal circumstances, employee flexibility is used to process workload peaks. However, in some sites, Royal Mail employees deployed "go slow" and work to rule tactics – such as refusing to take up available overtime. A “go slow” is deliberately doing your normal job more slowly. Work to rule is doing your normal job but insisting on following exactly, and with no flexibility whatsoever, the relevant rules/job specification - when it is not your usual way of working. The impact of this on maintaining normal service standards was exacerbated by the fact that managerial resource was necessarily redeployed on other tasks such as performing collection or delivery duties or supporting other Areas with greater backlogs/unofficial IA.

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Undoubtedly, unexpected and unplanned changes in working practices of front line employees, encouraged by the CWU, such as go-slow and work-to-rule activity have an immediate impact on Royal Mail’s ability to meet its quality of service targets. However, the impact of such action is not separately identifiable as the extent of activity varies from unit to unit and from individual to individual. So it has not been possible to quantify their direct effects on quality of service.

These tactics, alongside increased levels of sick absence, low work rates and general congestion in operational units added further pressure to managers and those frontline employees who didn’t take part in the IA, who had demonstrated an overwhelming commitment to Royal Mail and its customers during these difficult times.

This climate of poor industrial relations is further evidenced by the number of incidents of localised IA listed in Annex 6. The majority of these are linked to transformation. During June, July and August, they are not claimed as part of the adjustments to quality of service for the scheduled services (other than where they took place on days of strikes or during the recovery period) because their impact on the overall, national results is either relatively small or not quantifiable, though clearly they are indicative of the broader industrial relations climate as a result of the dispute over transformation.

However the instances of localised IA in September and October, particularly in pockets of the country such as East, North and South London and Liverpool (see Section 2.9) were much more significant and have contributed to Royal Mail’s application for relief on all performance against scheduled services during that period.

Additionally, Royal Mail encountered a much higher level of go slows and work to rules. Examples of such activity have already been described in the South, East and North London and Liverpool scenarios above. However, such activity was not constrained to these particular areas and was deliberately encouraged by local and national CWU representatives as part of the Doing Your Job Properly campaign (part of the wider CWU reaction to Royal Mail commencing deployment of transformational activity). The impact was felt throughout the country.

Examples of how the CWU encouraged this campaign are shown at Annex 18.

To recap, this activity manifested itself in:

• employees refusing to take up available overtime (and hence help cover any absent duties)

• employees taking part in unofficial union meetings

• employees withdrawing their use of private cars on delivery – resulting in delivery cut-offs and an increased level of part delivery failures

• a poor take up of scheduled attendance (i.e. pre-planned and contractual overtime)

• general go-slow activity on indoor work (in Mail Centres and Delivery Offices)

• continued refusal to cross picket lines (where other parts of the organisation were on strike, e.g. Royal Mail Engineers) or to accept mail diversions from other units

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• regular operational employees refusing to provide the normal levels of coaching and support for agency/casual employees

• a general lack of co-operation and flexibility, e.g. refusing to work an extra few minutes to clear peaks of work (without excessive demands for overtime payments) or refusing to support colleagues in other work areas who had a peak of work to clear (such as drivers refusing to sort mail)

• taking excessively long to carry out administrative tasks such as weighing pouches and/or signing in

• taking meal reliefs and breaks at the exact time specified on job description – when normally employees would be happy to flex these times to ensure key operational tasks were completed first– for example, employees refused to delay their meal breaks by a few minutes to complete the loading of a vehicle so that the vehicle could depart

• putting excessive administrative demands on managers, for example requesting to see contracts of employment and or union agreements

• sick absence levels also increasedg considerably, from an average of 4.85% in Royal Mail Network at the beginning of the Formula Year, to 5.21% in the second quarter of the year to 6.05% in the third quarter. Similarly, sick absence in Royal Mail’s processing and delivery functions increased from 4.54% at the beginning of the year to 4.89% in the second quarter to 5.42% in the third quarter. This represents a 20% increase in the level of sick absence between the first and third quarters. To put these figures in context, Royal Mail Operations employed an average of 5.8m hours per week in the first three quarters of the Formula Year. A 20% increase in sick absence leaves Royal Mail needing to find an average of 52,300 additional hours of resource per week to cover the absent posts – or the equivalent of almost 1,400 full time jobs per week (based on a 38 hour working week).

Traffic volumes are also significantly higher in the build up to Christmas: In 2006/0724, for example, Royal Mail handled an average of 332m items during the second quarter and this increased to 373m in the third quarter (an increase of 12% on Quarter 2).

The increased lack of co-operation, combined with significantly higher traffic volumes in the build up to Christmas and overstretched and exhausted managers meant that it took Royal Mail significantly longer to recover from the 4 days of main national IA in October than it did from the IA in June, July and August.

It should also be noted that before, during and after the October national strikes, Royal Mail managers continued to work incredibly hard in difficult circumstances to:

24 2006/07 traffic volumes have been used for this illustration as they are not affected by the 2007/08 industrial action. These figures do not include Downstream Access volumes.

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• provide continuity of service wherever possible and to protect mail integrity during and after strike days – deploying critical contingency and recovery plans – and often carrying out collection, sortation, driving and delivery duties themselves to help maintain customer service

• encourage and motivate employees to return to normal working practices after the strikes

• coach and train the increased number of casual/agency staff on site (without the help of workplace coaches in many circumstances)

• deal with animosity from some employees

• explain and plan for the changes to duty structures and national workplan associated with the deployment of Network 2007

• continually brief employees on progress on national negotiations

• continue to plan and consult on the changes relating to overall deployment of Royal Mail’s transformation plans, and

• communicate and explain the terms of the national agreement and help secure a yes vote to the November ballot.

Royal Mail is very grateful to its managers and those employees who did not take part in the IA - who showed immense loyalty and commitment to the organisation and their customers during this difficult period – working long hours and often postponing their holidays and knowing that, even after the “yes” vote had been secured, they would have no respite until they had managed Royal Mail through its busiest period of the year, i.e. Christmas.

It is also important to note that whilst managers were under such immense pressure, they had less time/resource to carry out other tasks that they would normally undertake to preserve good customer service, such as carry out quality checks or detailed root cause/diagnostic analysis.

It is impossible to separately isolate and hence quantify the quality of service impact of such incidents of local IA, go slows, work to rules and fatigue. However, it should be noted that Royal Mail’s performance is normally highest in the summer months (Periods 4-6) – as illustrated in the chart below - building a cushion for the winter months when bad weather and higher volumes impact on performance.

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1st Class Retail Quality of Service - 2006/07

92.0

93.0

94.0

95.0

P4 P5 P6 P7 P8 P9 P10 P11 P12

We therefore expect – and need - performance from June to August to be higher than target level to provide protection against the seasonal decline as traffic volumes grow in the build up to Christmas and winter weather affects outdoor performance.

It is clear that, even with the adjustments set out in Chapter 1 of this application, Royal Mail has foregone the benefits that it would normally build up during June to August period. For example, the adjustment that Royal Mail is seeking to its performance in Quarter 2 brings the 1st Class Retail result to only 93.0% compared to 94.3% and 94.8% in the previous two years, respectively. Similarly, Royal Mail has lost the opportunity to perform at 94.1% and 93.5% for 1st Class Retail in Quarter 3, as it did in the previous 2 years.

In conclusion, given that the impact of the worsening industrial relations climate inevitably increased as time went on, it took significantly longer for Royal Mail to recover from the national IA in October than it did in relation to the first wave of strikes in the summer. This was firstly due to the nature of the strike, i.e. 4 days of national IA with no opportunity for recovery in between. However, increased work to rule and go slows combined with higher traffic volumes, more wildcat IA and an increasingly stretched pool of operational managers meant that Royal Mail’s performance did not return to normal levels before Christmas.

This shortfall is not due to a lack of management focus on quality of service but is instead a reflection of the effects of an industrial relations dispute related to transformation activity which has created significant additional operational difficulties on both strike and non-strike action days.

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3. CHAPTER 3: ROYAL MAIL’S ATTEMPTS TO RESOLVE THE DISPUTE AND CONTINGENCY PLANNING

3.1 Introduction

This chapter describes, first, the steps taken by Royal Mail to avoid IA and, secondly, given the likelihood of IA, Royal Mail’s actions to manage its business effectively and to make contingency plans to mitigate the consequences for mail users of IA by its employees. The latter is provided under the following headings:

• Corporate Priorities and Governance Procedures;

• Contingency Plan Development and Preparation;

• Contingency Plan Execution.

3.2 Royal Mail’s attempts to resolve the industrial action

It is important to note that in advance of the CWU rejecting Royal Mail’s proposition in connection with transformational change and calling the national ballot which ultimately led to the IA, Royal Mail had undergone months of strategic involvement meetings and negotiations with the CWU. By the beginning of September, 49 meetings, amounting to some 250 hours of meeting time, had been spend negotiating with CWU on this issue.

Royal Mail followed and exhausted its Strategic Involvement framework and did everything it reasonably could, taking into account its regulatory obligations, to find a solution to the dispute both before the IA commenced and subsequently, including the following:

• Royal Mail restructured the original pay offer: negotiations commenced on 21st February and took place on 12 days over the following weeks;

• Pay negotiations were moved to ACAS from 20th June, and resulted in four days of talks;

• Royal Mail jointly agreed with the CWU to a ‘period of calm’ in which both parties refrained from taking action whilst an agreement was sought;

• The TUC was invited to become involved and did so from 9th August, resulting in seven further days of talks;

• There were five continuous days of further unsupported talks with the CWU from 5th September;

• Discussions with the involvement of the TUC resumed from 26th September, with 17 days of talks including 26 hours over one weekend alone;

• Royal Mail constantly monitored the possibility of a challenge to the lawfulness of the action in the context of all the wider circumstances. Ultimately it was felt appropriate to apply for a High Court injunction to prevent further IA planned to commence on 15th October; that application was successful.

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In addition, the deployment of major initiatives such as Network 2007 was delayed from the summer so as not to jeopardise talks, even though this meant that deployment eventually had to take place when traffic volumes were significantly higher and the weather much worse than it would otherwise have been.

A deal was finally reached in negotiations with the CWU on 12th October following a successful application for an injunction restraining the then most recently notified ballot for further IA, although the CWU subsequently tabled 27 amendments. The deal was endorsed by the CWU Executive on 22nd October and the members voted to accept it in November.

3.3 Corporate priorities and governance procedures

Royal Mail frequently reviews its contingency plans which set out the business’s operational response to a range of unplanned events that can have an impact upon the operation of the pipeline, including IA. In light of the evident disagreement of the CWU to many of the company’s plans for operational and personnel changes, Royal Mail particularly scrutinised its contingency arrangements for IA in 2007/08, and had a number of meetings with Postcomm to discuss such plans.

The diagram below provides an overview of Royal Mail’s Corporate Governance process as applied for the IA in 2007/08:

Royal Mail Holdings Board is responsible for reviewing and deciding Royal Mail’s Corporate Priorities (and did review them in June 2007). The Corporate Priorities recognise that Royal Mail cannot continue to provide normal service during IA. They therefore aim to maximise the level of service provided, in order of priority, relative to the resources available. The Corporate Priorities take into

RM Holdings Board

Operations Executive

Central Industrial Action Team

Industrial Action Control Team

Network Industrial Action Team

Area Crisis Control Teams

Business Protection

Team

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account Royal Mail’s regulatory obligations and the needs of both strategic and vulnerable customers.

The Corporate Priorities, shown below in order of precedence, were shared and discussed with both Postcomm and the Department of Business Enterprise and Regulatory Reform (BERR):

• Cash to Post Office Counters

• Access to Mail Services

• Parcelforce Worldwide Express/Guarantees

• RM high profile bespoke products

• Special Delivery

• Processing of outward mail

• Processing of inward mail

• Delivery.

A more detailed explanation of these priorities is provided at Annex 19.

The Royal Mail Letters Operations Executive had overall accountability for managing the dispute, deployment of the industrial relations plan (i.e. negotiations with the CWU) and optimisation of the Royal Mail pipeline during the strike.

However, the accountability for managing the dispute and the negotiations was discharged on a day to day basis through the Central Industrial Action Team reporting daily to a small group chaired by the People & Organisational Development director. The Central Industrial Action Team was responsible for developing detailed plans for management of the dispute. Working closely with Royal Mail’s legal team, this team managed Royal Mail’s day to day tactics and led negotiations with the CWU before, during and after each strike, although ultimately discussions were led by a small group of people, including the Chief Executive at a later stage. This team included a commercial representative responsible for ensuring customer facing teams25 within Royal Mail were kept up to date with the latest developments so that they could respond effectively to customer enquiries and give customers the best possible advice on how/where/when they should post their mail. In addition, this team was responsible for developing external media messages and the internal involvement and communications campaign.

All plans produced by the Central Industrial Action Team were endorsed by the Operations Executive and Chief Executive Officer before deployment.

The Central Industrial Action Team had the authority to call on advice, support and resources from the Business Protection Team. The Business Protection Team is made up of senior leaders from

25 Customer Service Advisors, Account Managers, Customer Operational Managers.

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across the whole of Royal Mail Group and has representatives from Operations, People & Organisational Development/Services, Corporate & Social Responsibility, Internal Communications, External Relations, Marketing, Sales & Customers Services, Regulation, Group Technology, Security, Assets & Property, Legal Services and Finance.

The Industrial Action Control Team was responsible for execution of the plans developed by the Central Industrial Action Team. This team centrally co-ordinated and communicated tactical plans, operational contingencies and priorities to Royal Mail operational managers – including provision of round the clock support and advice. This team was also responsible for the integration of contingency plans between Mail Centres and the Network.

It is important to note that detailed operational contingency plans are dynamic and are constantly flexed to respond to changing circumstances. The Industrial Action Control Team was also responsible for coordination of real time operational changes e.g. organising diversions of mail.

In addition, this team was responsible for specifying and co-ordinating operational performance reporting requirements during the crisis and compiling key briefing packs for the Operations Executive, Central Industrial Action Team and BERR.

As stated previously, connectivity is key to maximising pipeline performance and supporting achievement of Royal Mail’s Corporate Priorities. Optimising the Network operation (air, rail and road) within the available time/resource window is critical and this responsibility fell to the Network Industrial Action Team.

Continuity of network operations requires specialist skills, e.g. HGV qualified drivers, employees that have the correct security clearance and training to work in airport operations. Therefore, development of the network interface plan (which maps specialist resource to the most critical network operations) is generally the first task in development of the overall contingency plan for Royal Mail.

The network interface plan was communicated to all network operational managers and to Area Crisis Control Teams to ensure effective integration between Mail Centres and network arrivals and despatches.

An Area Crisis Control Team was set up in each of Royal Mail’s 30 geographical areas. These were generally made up of Area Management Team representatives26. Each Area Crisis Control Team was responsible for maximising delivery of the Corporate Priorities within the constraint of the resources available to them in their area and deployment of the network interface plan in Mail Centres. These teams were also responsible for ensuring their key customers were kept updated on local service levels and were required to report key performance statistics back to the Central Teams.

26 Area General Managers plus Mail Centre, Delivery Sector, Commercial and Personnel Managers.

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3.4 Contingency plan development and preparation

After determining its Corporate Priorities and putting in place the team structures required to manage the dispute, Royal Mail commenced detailed planning and preparation work. The aim of these plans was to minimise disruption to customers during the dispute and restore business as usual service afterwards. This planning and preparation is best explained under 5 key headings, which each are described, in turn, below.

3.4.1 Scenario Modelling and Development of Key Strategies:

By definition, contingency plans attempt to anticipate risks and define the actions that should be taken to mitigate those risks. Given the size and complexity of Royal Mail’s operation, it is impossible to anticipate and prescribe a response to every potential combination of risks/circumstances. For this reason, contingency plans are relatively generic in nature – setting out broad principles and strategies that should be followed - and are flexed to respond to the real time circumstances at national and/or local level.

In advance of the IA, the Central Industrial Action team prepared high level contingency plans for a set of theoretical IA scenarios. These plans established the level of resource required to maintain service against each of the Corporate Priorities which in turn determined whether each priority could be fully or partially achieved for each scenario27.

A number of scenarios were modelled and contingency plans were developed as a result. Consideration of these scenarios provided Royal Mail with some key operational principles and strategies. These are summarised below:

• Post Office Ltd outlets would be pre-stocked with cash in advance of any IA and, for prolonged action, would receive a continuous supply of cash using pre-trained Post Office managers.

• To maintain access to services, Royal Mail aimed to provide a single collection from Post Office Ltd outlets and Business boxes using managerial volunteers. Where the level of available resource allowed, a single collection from post boxes would also be carried out – particularly for high volume boxes at risk of overflowing.

• Large posting customers would be contacted in advance and informed of alternative access arrangements available to them (such as posting over the Counter, bringing mail directly to a Mail Centre or posting out of area if a neighbouring Mail Centre was operating as normal).

• High profile bespoke services such as House of Commons and Royal Household mail would continue through the use of Branch Direct network (which was not on strike).

• Network operations would be maintained wherever possible, primarily for the despatch and receipt of Special Delivery and Parcelforce Worldwide mail, using enhanced road operations

27 For example, a minimum of 126,000 people are required to fully cover Corporate Priorities 1 to 8 in the event of a 24 hour national strike – so with a managerial volunteer force of around 5,000 managers, not all priorities can be fully covered.

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resourced through managerial volunteers and agency drivers, where possible. To help clear backlogs of mail Royal Mail would make use of additional rail services and flex flights (even if mail was travelling outside of normal workplan requirements).

• Processing of Special Delivery mail would take priority in Mail Centres and the volume of mail outward and inward processed by machine would be maximised, using managerial volunteers. Where further resource was available, bulky items would be processed to reduce congestion in operational units. All other remaining mail would be stored for processing on return to work.

• Delivery of Special Delivery items would take priority in Delivery Offices. Where further resource was available, delivery of mail which had been machine sorted to large firms would also be carried out. All other mail would be stored for delivery on return to work.

• Operations would be planned in such a way that when striking employees returned to work there was a clear and significant head of work waiting – helping drive efficiency and throughput after the strike. Managers were guided to be courteous, polite and welcoming to employees after IA but to ensure they commenced their duties promptly after taking part in a return to work briefing.

• In contingency situations Royal Mail will often divert mail to other units. During the national strikes in June, July and October, Royal Mail’s policy was not to divert mail, i.e. each unit was responsible for clearing its own backlog. For regional strikes, Royal Mail’s policy was only to divert mail where managers were confident that the diversion would not trigger a further walk out in the unit(s) accepting the diversion.

• A key component of the contingency plan, which was discussed with Postcomm in advance, was to ensure that striking employees did not recover their lost income through higher than normal levels of overtime on their return to work. In the past, Royal Mail has condoned the payment of overtime to clear up backlogs. However, this approach offers little to discourage further IA and hence further disruption to customers. In the short term, Royal Mail’s ‘restricted overtime’ policy may increase the time required to clear mail backlogs. However, it does provide a longer term disincentive against future IA or prolonging the dispute. Overtime was available after strike days but only at the normal level for each office and available overtime was not always taken up as employees exercised work to rule tactics.

• Casual and agency staff would be used wherever possible and appropriate. However, it is important to note that there are limits on the possible use of casual and agency staff due to, firstly, limited availability of suitable candidates (especially in certain areas and at certain times of year), secondly, the need to comply with Licence obligations in respect of mail integrity (which require, amongst other things, criminal records checks and training), and, thirdly, legal restrictions on employment agencies providing agency staff during IA (see 3.5.2 below).

Following discussion at the Postcomm / Postwatch / Royal Mail update meeting on 5th June, Royal Mail adopted a ‘first in/first out’ approach to clearing the mail backlog – ensuring that mail held in the backlog was handled and delivered in the order in which it was posted. Whilst this is the fairest

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approach, it is the approach which has the most detrimental impact on Royal Mail’s measured quality of service and hence exposes Royal Mail to greater financial penalties for failing to achieve its targets.

This was particularly the case during the national strikes in June and July. However, during the October national strikes, the huge backlogs of mail created by what was effectively 6 days of continuous lost service due to the 4 days of national IA made the first in/first out task more challenging as mail that remained uncollected in pillar boxes, Post Office outlets and/or customer premises – once collected – was mixed together and hence could not be processed in date order.

Also, due to the scale of the backlog from the October national strikes – which Royal Mail had foreseen and planned for in advance – Royal Mail had to procure additional ‘outhouses’ to protect integrity of mail which could not be held within our existing infrastructure – particularly for 2nd Class mail and Mailsort 3. Royal Mail put procedures in place to ensure that mail left these outhouses and our Mail Centres in the order it arrived.

3.4.2 Establishing Service Provision: Royal Mail maintains an operational skills database of managers and administrative staff across all functions. This database is used to assign managers to operational duties to support Christmas and contingency operations. In advance of the first national strike on 29th June, managers were requested to update their skill details on this database so that those with specialist skills could be allocated to those specialist tasks28.

Details of volunteer managers were then shared with Network and Area Crisis Control Teams. This information, alongside local knowledge of the level of agency staff available plus forecasts of the number of employees that were expected to turn up for work on strike days, helped them plan and assign tasks – working through the list of Corporate Priorities until the level of resource available to them was exhausted.

3.4.3 Operational Training and Briefing: A number of activities were carried out in advance of the IA to ensure that Royal Mail managers were fully equipped to cope with the IA. Four main channels of communication were used, namely face to face presentations, conference calls, training courses and email document cascades.

Face to face presentations and conference calls were primarily used to ensure managers understood the Royal Mail Corporate Priorities and the plans that underpinned achievement of these priorities.

Business Continuity training was given to all senior operational managers. This training tasked teams of managers with developing an operational response (facilitated by experts) to a variety of theoretical crises.

28 Such as HGV driving skills, machine operating skills, airport security training/clearance and security training.

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A number of supporting documents were refreshed and reissued in advance of the first strike, the most important being the “Royal Mail Guide to Handling Industrial Action”29. Many other guides and tools to assist planning were also issued.

3.4.4 Internal Communications Plan:

Throughout the period of IA, Royal Mail embarked upon an internal involvement and communications campaign. The aim of the campaign was to ensure that employees fully understood the facts relating to Royal Mail’s pay offer in the context of its plans for and the necessity for transformation, the commercial realities facing the company, the impact IA would have on our customers and the risk of losing customers to competitors.

The core of the campaign, led by operational managers, was daily Work Time Listening and Learning sessions between frontline employees and their managers. These briefings were supported by posters and leaflets, DVD recorded messages and personal letters to home addresses from the Chairman and Chief Executive. Examples of the posters and personal letters are shown at Annex 20.

A key component of the campaign was briefings carried out when employees returned to work after the strike – when managers gave an update on how the action had impacted on customers.

Royal Mail also took steps to assist employees who wanted to come to work on strike days by:

• Setting up a 24 hour helpline where employees could get advice on how to come to work

• Allowing employees to work different shifts or in different units to usual

• Allowing employees to come to work in casual dress (although with proper identification)

• In some cases, arranging buses to transport people through picket lines that they would have otherwise been too intimidated to cross.

This campaign continued throughout the period of industrial unrest with daily e-mail briefings cascaded to managers (supported by the pyramid of daily conference calls) providing updates on:

• The latest state of play with negotiations and announcements of further strikes

• Workplan and duty changes associated with Network 2007 deployment

• Guides to other key components of Royal Mail’s transformation programme – such as flexible working

• Briefings on planned Mail Centre infrastructure changes

• Guidance on helping our people come to work during IA.

29 An 84 page document which summarises virtually everything a manager needs to know about how to manage industrial action.

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These briefings also include Work Time Listening and Learning material for cascade to front line employees – such as "The Facts – A more flexible working week”, “Fed up with losing money” and "let’s talkabout….Door to Door suspension during IA" material shown at Annex 20.

Royal Mail also used its infrastructure of large screens in operational units to communicate messages relating to the eventual joint national agreement – to help secure a yes vote in favour of the agreement and set up phone lines where employees could dial in to hear recorded messages from Adam Crozier – explaining the need for transformational change.

3.4.5 Performance Reporting and Performance Management Procedures:

In advance of the dispute a number of strike related enhancements were made to Royal Mail’s ‘business as usual’ performance reporting and performance management procedures.

In addition to normal reporting requirements, operational managers were also asked to report the number of people that had turned up for work and any emerging industrial relations issues, e.g. any unit threatening to take or actually taking unofficial action.

A series of daily conference calls and briefings were set up to ensure that the Central Industrial Action Team and Operations Executive were fully briefed and could take tactical decisions regarding the movement of mail and available resources over the coming 24 hours – ensuring dynamic management of the dispute as events unfolded. These briefings also helped inform and shape the ongoing union negotiations and the internal and external communications campaign.

Territory, Network and Area level conference calls were also held to ensure that all managers understood the operating priorities and plans for the next 24 hours.

This approach was replicated throughout the Autumn national strikes and recovery period – with close monitoring of hot-spot areas that were taking longer than other units to clear their backlog (due to extended unballoted IA, work to rule and go-slows – See Chapter 2 for examples).

3.5 Contingency Plan Execution

Royal Mail was provided with the legal minimum of 7 days notice of each incident of official IA (clearly little or no notice is provided for unofficial IA). During this time, Royal Mail was able to translate the generic contingency plans dictated by the Corporate Priorities (as described in Chapter 3.3) into specific operating plans.

This section provides an overview of the specific operating plans that were deployed for each of the key incidents encountered during the Formula Year and provides reassurance that Royal Mail adhered to its Corporate Priorities and followed the key principles and strategies described previously.

3.5.1 24 Hour National Strikes

For the strikes on 29th/30th June and 12th/13th July Royal Mail executed a plan which followed the key principles developed in advance for a 24 hour national strike. In summary:

• Post Office Counters were pre-stocked with cash

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• Managerial volunteers were deployed to maintain key network routes, collect from key sites, deliver Special Delivery mail and operate automated sorting equipment in Mail Centres

• Alternative network schedules were deployed (shown at Annex 21 and 22 for the strikes on 29th/30th June and 12th/13th July, respectively) – and these were communicated to the operation using the briefing channels described above

• Mailsort 2 and 3 was accelerated through the pipeline to be delivered in advance of the strikes where possible – so as not to add to the backlog of mail after the strike

• On return to work, employees were promptly put to work clearing the backlogs and overtime was restricted (to normal levels) so that striking employees did not recover their lost earnings

• Agency and casual employees were recruited to help clear the backlogs where possible.

From a national perspective, there was no departure from the contingency plan that had been developed and agreed in advance of the strike. Deployment of contingency plans at a local level is dependent on availability of resource and local, operational circumstances, as well as factors that are outside of Royal Mail’s control.

3.5.2 Rolling Strikes

As demonstrated in Chapter 2.6, the rolling IA brought a level of complexity which, with only 7 days notice, brought new challenges to Royal Mail in developing and deploying operational contingency plans. An example of Network Contingency Plans for the rolling strikes is shown in Annex 23.

Clearly these plans were less prescriptive and more dynamic in nature, in order to respond to the unfolding events. However, they were designed and executed in a way that adhered to the Corporate Priorities and principles set out previously.

During this time, the reliance on ordinary and agency casuals increased significantly as shown in the table below:

Table 3.1 Number of Casuals Hours Used Before, During and After the strikes

Hours used per week (k)

Before (average of w/c

26th March to

18th June)

W/C 25th Jun

W/C 2nd Jul

W/C 9th Jul

W/C 16th Jul

W/C 23rd Jul

W/C 30th Jul

W/C 6th Aug

W/C 13th Aug

Ordinary 12.4 12.6 19.2 16.1 19.0 19.7 21.9 20.1 20.0

Agency 8.7 7.630 16.1 19.1 33.7 42.7 64.9 77.1 44.6

30 Casual levels did not increase this week as the industrial action was on a Friday. Casuals were used the following week to help clear the backlog.

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This table demonstrates that in the peak weeks during the rolling strikes Royal Mail employed almost 4-5 times as many casual hours as normal. Although it is important to note that agency/casual employees do not have the same level of experience as permanent employees and are therefore more likely to make sortation errors (which can lead to quality of service failures) and to work less quickly. Speed is a particular problem when agency/casual employees carry out delivery and/or collection duties which they are unfamiliar with. Their lack of experience on the route can lead to part failures for the collection and delivery standardised measures if they are unable to complete the route in the available time.

However, it is important to note that Royal Mail has access to a finite number of casual and agency employees. Under Regulation 7 of the Conduct of Employment Agencies and Employment Business Regulations 2003, employment agencies “can not introduce or supply a work seeker to a hirer to perform:

• the duties normally performed by a worker who is taking part in a strike or other IA (“the first worker”), or

• the duties normally performed by any other worker employed by the hirer and who is assigned by the hirer to perform duties normally performed by the first worker

unless in either case the employment business does not know and has no reasonable grounds for knowing, that the first worker is taking part in a strike or other IA.”

During this period some potential agency/casual staff opted not to work for Royal Mail for personal reasons (e.g. preferring not to enter a workplace with a strained industrial relations climate, political beliefs, etc).

Royal Mail also has a series of stringent checks that must be carried out, to ensure Mail Integrity, before new employees can start operational duties – and this also limits Royal Mail’s ability to bring in additional employees at short notice. Mail integrity obligations form an important part of Royal Mail’s Licence obligations.

It should also be noted that Royal Mail has a fixed amount of operating equipment (e.g. sorting frames, vehicles) and over-supply of agency/casual staff would simply result in increasing congestion in operational units at additional expense.

3.5.3 48 hour national strikes on 4th-6th and 8th-10th October

Having developed a theoretical contingency plan for a continuous national strike in advance of the first national strikes, Royal Mail had anticipated well in advance that this form of action would present a new set of challenges.

Whilst Royal Mail’s overall contingency plan for the 4th-10th October national strikes followed the Corporate Priorities set out above and the general principles that were deployed during the June, July and August strikes, there were some very specific differences to deployment of the plan during this period (necessitated by the nature of the national strikes).

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For example, Royal Mail had considered sealing post boxes in advance of these strikes – as has been done previously during prolonged periods of IA. However, it was decided that this would cause even greater inconvenience to our customers. Instead, Royal Mail placed a poster on each box recommending that customers take their mail to the nearest post office – where the likelihood of a collection was much higher. An example of this poster is show at Annex 24.

During the strikes, in line with Corporate Priorities, Royal Mail managers endeavoured to regularly collect from high volume boxes – to prevent these boxes overflowing. As before, managerial volunteers were utilised both on strike days and during the post strike recovery period to help restore service. In fact, managers were being pulled from all over the country to support the areas with the greatest and most prolonged backlogs of mail, such as Liverpool and London.

The greatest challenge was collecting and holding, in a protected environment, 6 days worth of mail once the collection operation resumed – when Royal Mail knew that the existing infrastructure (buildings, materials handling equipment, etc) was only capable of holding a maximum of 2 days worth of mail.

To address this issue, Royal Mail invested in the short term lease of 7 additional buildings, referred to as outhouses, in Livingstone, Leeds, Manchester, Coventry, Dartford, North East London and Bristol. These buildings were originally planned to be used as buffer storage to hold new collection mail coming in until it could be processed. However, Royal Mail quickly turned them to dual purpose units that could also manually process mail.

Packets in particular were processed at these sites as a practical solution. Packets take up significantly more space/containers than letters and therefore were processed in outhouses to avoid creating further congestion in Mail Centres – thus allowing Mail Centres to concentrate more on machineable mail.

These outhouses were staffed by Royal Mail managers and casual/agency staff. Excellent teamworking between Royal Mail Operations and Royal Mail Assets meant that most of these outhouses were sourced, rented and made operational within a week.

In addition, Royal Mail invested in cardboard containers to hold the additional mail and accelerated the release of 32,000 York containers that were already in store or in production to support the Christmas operation.

Having had more time to plan for the October strikes than for the strikes in June, July and August, Royal Mail was also able to subcontract a number of road services to help trunk the backlog of mail. Additional rail services were also employed between Scotland and Princess Royal Distribution Centre in North London.

Additional air services were also used between Edinburgh-Bournemouth, Edinburgh and Belfast and Edinburgh-Inverness and Skynet 17 (a flight from East Midlands Airport to Edinburgh was extended to run on Wednesday 10th, Thursday 11th and Friday 12th October - this flight normally only operates on a Monday evening).

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In anticipation of bulk outs on the air network, caused by the excessive volumes, a number of contingency vehicles were placed at airports and railway stations to act as a buffer and carry any excess volumes by road.

Royal Mail recognised that without interventions Royal Mail would not be able to absorb the mail backlog within normal resourcing levels before the Christmas peak began. Therefore, Royal Mail took a number of steps to increase the level of human resources available to them during the recovery period. Again, Royal Mail managers in administrative/support/headquarters functions carried out collection, processing, driving and delivery duties in their local Mail Centres both during and after the strikes.

Wherever possible, casual and agency employees that had been recruited to support the Christmas operations were brought in early and additional managerial resource was released to accelerate and increase the level of recruitment. The table below demonstrates how the level of casual/agency hours utilised increased significantly during this period:

Table 3.2 Number of Agency/Casual Hours used after October National Strikes

Hours used per week (k)

Before (average of w/c

26th March to

18th June)

W/C 8th Oct

W/C 15th Oct

W/C 22nd Oct

W/C 29th Oct

W/C 5th Nov

W/C 12th Nov

W/C 19th Nov

W/C 26th Nov

Ordinary 12.4 27.8 47.6 75.5 78.3 76.6 82.7 88.7 138.4

Agency 8.7 69.6 88.5 91.0 71.1 64.0 63.6 61.6 66.5

Combined 21.1 97.4 136.1 166.5 149.5 140.6 146.3 150.4 204.9

Note:

Agency employees could not be fully used during the 48hrs of national IA in week commencing 8th October due to legislation restricting the use of agency employees during IA.

The school half term holidays in October also meant that less agency/casual employees were available to Royal Mail.

Royal Mail also took the extremely difficult decision to suspend the Door to Door service for a period of three weeks in recognition that it could not guarantee delivery, particularly in areas demonstrating work to rule tactics. This decision, which directly resulted in lost revenue, allowed customers to make alternative arrangements, rather than letting them down with false promises and meant that Door to Door (an unregulated product) did not add to the backlog of mail to be delivered.

Annex 25 shows the network contingency plan for 4th to 10th October. The network operations plan for the immediate recovery phase – 10th to 13th October – is shown at Annex 26. This plan clearly

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demonstrates how Royal Mail exploited the available resources to help facilitate clearance of the backlog.

3.5.4 Regional Industrial Action

The only adaptation from the plan to take into account local circumstances, in relation to the national strikes in June and July and the rolling IA in July and August, was caused by the disputes in Oxford and Scotland.

During the Oxford strike, Royal Mail’s key response was to:

• Take preventative action (such as briefing sessions, deliberately not asking collection/delivery employees to carry out Mail Centre processing work) to ensure the Mail Centre dispute did not escalate to the collection and delivery operation – thus ensuring collections and deliveries were carried out as normal

• Encourage large customers to post ‘out of area’ via neighbouring Mail Centres that were not on strike

• Use volunteer managers to operate sorting machines to maximise the volumes of machineable mail that were outward and inward processed – thus maintaining a head of work for Delivery Offices in Oxford

• Use volunteer managers to process Special Delivery mail items to ensure they were not delayed.

During this strike, Royal Mail deliberately did not attempt to divert mail posted in Oxford to other Mail Centres, as there was a risk this would result in escalation of the dispute. However, on return to work, outward mail was diverted to other Mail Centres so that Oxford could concentrate on clearing their inward backlog – hence reducing the recovery time.

In Scotland, the strike affected collection, processing and delivery operations. The key response was as follows:

• Outward traffic was diverted to other Mail Centres throughout the North Territory - but only where there was no risk of escalating the dispute

• Volunteer managers (from striking delivery offices and administrative units) concentrated on processing inward mail (including working weekends)

• Other Mail Centres provided a greater breakdown of inward mail – allowing West of Scotland to forward mail directly to Delivery Offices without requiring any intermediate sortation at the Mail Centre

• Managers endeavoured to deliver as much Special Delivery as possible.

The only adaptations, to suit local circumstances, to the national contingency plan in relation to the October national strikes were in the Areas that encountered extensive unofficial IA and work to rule, namely Liverpool, South London and East & North London:

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In Liverpool:

• Outward mail was diverted to other Mail Centres across the UK and most other Mail Centres provided a greater breakdown of inward (incoming) mail to Liverpool so that it could be forwarded directly to Delivery Offices

• Managerial resource was utilised to collect and process as much mail as possible during the strikes – with priority on Post Office Ltd and Business customer collections (helping ensure Special Delivery items were collected – in line with Corporate Priorities)

• Managerial resource was used to keep the Special Delivery Lockers operating in the Mail Centre and Delivery Offices and hence maximise delivery of Special Delivery items within the Area

• Customer service access points were set up in each delivery unit to allow public access to collect important items of mail

• Additional investment was made in training drivers to drive 7.5 tonne vehicles

• Additional agency/casual employees were brought in to help clear the backlog

• Managerial resource was deployed to operate sorting machines in the Mail Centre – with managers often working 10-12 hours a day to maintain service

• Several hundred managers from surrounding areas were transported into Liverpool to support clearing the backlog

• Extra vehicles and managers were used to transport employees, agency and casual staff across the picket lines.

Despite these efforts, the sheer scale of the mail backlog and lack of co-operation from employees when they did return to work, meant that it took many of the units in the Liverpool area until late November to restore normal service.

The East & North London management team carried out a number of interventions to help restore customer service, such as:

• Diversions of outward mail to other Mail Centres for processing

• Focusing on inward machine sortation of mail

• Bringing in Christmas casuals earlier than planned

• Recruiting Agency casuals – and extending the normal search area for casuals as far as Luton

• Calling in managerial resource from Royal Mail’s headquarters in London (e.g. from Sales, Marketing and Operational Support functions) to provide continuity of service, such as

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collections from key customer and Post Office sites, delivery of Special Delivery items (in line with Corporate Priorities) and keeping Callers Offices open.

Whilst the majority of Delivery Offices in the Area had restored normal service by mid November, a few CWU strongholds such as Finsbury Park/South Tottenham took slightly longer to clear.

As in all Areas, the management team in South London carried out actions to ensure service was returned to normal as quickly as possible under the circumstances. These included:

• Increasing the level of casual/agency employees

• Making use of managerial volunteers, particularly from Royal Mail ‘Headquarters’ – Sales, Marketing and Operational Support functions – as well as their own local administrative staff

• Diverting outward mail (e.g. to Mail Centres in West Territory and Watford Mail Centre) so that they could focus on continuous processing of inward mail

• Receiving a greater sortation breakdown on inward work coming from other Mail Centres – to reduce the complexity of the sortation task in South London Mail Centre

• Commissioning Parcelforce Courier drivers to deliver the backlog of packets in the Streatham area (leaving normal delivery staff to focus on letters and flats)

• Providing continuity of service for Special Delivery wherever possible – using managerial resource to collect, process and deliver these items

• Directing Mail Centre employees to carry out indoor and outdoor delivery tasks to help clear the backlog in SW1 delivery office (which is co-located in the Mail Centre).

3.5.5 Ongoing Service Restoration Actions

It must be noted that recovery, to pre-strike performance levels, from the Autumn strikes took considerably longer than it did from the June, July and August strikes. The reasons for this have been explained previously in this report but to recap:

• The nature of the strike, effectively 6 consecutive days of lost service due to 4 days of national IA, meant that Royal Mail had no opportunity to recover in between strikes and had a significantly larger backlog when striking employees returned to work;

• Traffic volumes are significantly higher in the Autumn period than in the Summer months; and

• The extensive unofficial IA and work to rule activity prolonged the recovery.

Clearly, Royal Mail could not recover from such an extensive industrial dispute overnight. This section has set out the steps that Royal Mail took to recover service quickly after each incident of IA. However, the longer term implications of such a dispute should not be underestimated – trusting relationships between Royal Mail managers and employees need to be rebuilt and the day to day

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standards and disciplines that resulted in record breaking quality of service performance in 2006/07 have to be re-established.

Royal Mail has undertaken a number of actions to reinvigorate the standards, disciplines and ways of working required to ensure long term continuity of performance at target level. These actions include:

• Re-embedding basic disciplines and standards such as daily fix and monitor conference calls, compliance audits of operational standards and quality checks

• Greater exploitation of quality diagnostic tools – through further user training and communications/awareness campaigns

• Ongoing front line employee communications reminding them of the importance of excellent customer service

• Each Area Management Team developed a comprehensive plan of action

• Levels of contingency staffing were increased

• Additional vehicle runs to delivery offices were introduced

• Additional early relief collection waves to accelerate mail into Mail Centre for processing were introduced

• Additional delivery sweepers to capture any late mail arrivals at Delivery Offices were introduced

• The level of resource to carry out quality diagnostic checks and analysis was increased.

3.6 Mechanisms for briefing Postcomm

Before and during this IA, Royal Mail’s Operations Director, Service Integrity Director and Network Director held a number of meetings with Postcomm (and Postwatch) to ensure they:

• Were kept up to date on the latest industrial relations developments,

• Understood and had the opportunity to input into Royal Mail’s Corporate Priorities and Contingency Plans, and

• Were kept up to date on the recovery operation and status of mail backlogs.

Meetings were held during the year on:

• Tuesday 5th June

• Wednesday 25th July

• Friday 3rd August

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• Tuesday 21st August

• Wednesday 3rd October and

• Tuesday 23rd October.

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4. CHAPTER 4: ROYAL MAIL'S OPERATIONAL RESPONSE AND SERVICE RECOVERY

4.1 Introduction

The following chapter explains that Royal Mail, through effective contingency management, commercial focus and tight managerial grip, did minimise customer disruption during the IA and restore normal services as quickly as reasonably possible thereafter.

4.2 Return to Quality of Service

The charts at Annex 27 show day by day national quality of service performance for the period 4th June to 2nd December for all products for which Royal Mail is seeking quality of service relief (in groupings) as set out in Condition 4 of Royal Mail’s Licence. These charts illustrate the length of time that it took Royal Mail to restore service.31

Clearly, Royal Mail’s first priority was to restore service to customers quickly but it is important to recognise the challenges and constraints that Royal Mail faced during this period, many of which have been mentioned previously in this application.

The backlog of mail inevitably meant that there were more items for processing and delivery on days subsequent to the strike days. Even under ordinary conditions (which these were not) it is not possible to process / deliver a significantly higher number of items within the same timescales.

The industrial relations climate was extremely poor and Royal Mail faced a general lack of co-operation from employees before, during and after the strikes. This lack of co-operation took the form of go slows, work to rule activity and, in some places, localised unofficial IA.

Royal Mail employed as much contingency resource as possible during this period – although this resource was finite (and hindered by the fact the summer strikes occurred during the highest holiday period in the UK and October national strikes occurred just before the October half term breaks).

Royal Mail employed a policy of ‘restricted overtime’, whereby striking employees would not be allowed to make up their lost earnings through working higher than normal levels of overtime in the recovery period following each strike, so as to avoid creating an incentive to strike.

Royal Mail relies on a massive infrastructure of buildings, vehicles, equipment and people – this infrastructure can not be replicated at short notice.

Royal Mail has access to only a limited supply of agency and casual employees that can be called in at short notice to support contingency and recovery operations

An abridged version of the 1st Class Retail chart for the period most affected by the June/July and August strikes is shown below:

31 It should be noted that the targets apply at the grouping level, not to each individual product within the grouping. It is possible for a product to be below the target level for the grouping but for the grouping target to be achieved (because of weighting factors based on relative volumes of mail).

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1st Class Retail Quality of Service - By Day of Posting

0.010.020.030.040.050.060.070.080.090.0

100.0

25/06

/07

27/06

/07

29/06

/07

01/07

/07

03/07

/07

05/07

/07

07/07

/07

09/07

/07

11/07

/07

13/07

/07

15/07

/07

17/07

/07

19/07

/07

21/07

/07

23/07

/07

25/07

/07

27/07

/07

29/07

/07

31/07

/07

02/08

/07

04/08

/07

06/08

/07

08/08

/07

10/08

/07

12/08

/07

14/08

/07

16/08

/07

Dat e

QoS

This chart clearly illustrates the steep decline in performance for items posted on Thursday 28th and Friday 29th June (associated with the first 24 hour national strike). The chart also demonstrates that after this strike quality of service returned to target levels by Friday 6th July – approximately one week after the strike.

A second steep decline in performance is seen for items posted on 12th and 13th July – corresponding with the second national 24 hour strike. Once again, we see a similar pattern of recovery. However, performance did not fully recover to target level within a week as it did with the first strike as circumstances were different. The IA in Oxford Mail Centre together with the detrimental impact on performance of the poor industrial relations climate throughout the country, combined with the flooding, meant that quality of service did not recover consistently before the next series of rolling action by the CWU which commenced on 25th July.

The impact of the rolling IA is seen from 25th July onwards – with performance reaching its lowest levels on 1st and 2nd August as Mail Centres, Network operations and Delivery Offices all took action. The rolling IA concluded on 8th August and from that period we saw a speedy recovery – with performance returning to target level for items posted on 15th August onwards, before declining again in early September.

An abridged version of the 1st Class Retail chart for the period most affected by the national IA in October is shown below:

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1st Class Retail Quality of Service - By Day of Posting

0.010.020.030.040.050.060.070.080.090.0

100.0

17/09

/07

19/09

/07

21/09

/07

23/09

/07

25/09

/07

27/09

/07

29/09

/07

01/10

/07

03/10

/07

05/10

/07

07/10

/07

09/10

/07

11/10

/07

13/10

/07

15/10

/07

17/10

/07

19/10

/07

21/10

/07

23/10

/07

25/10

/07

27/10

/07

29/10

/07

31/10

/07

02/11

/07

04/11

/07

Dat e

QoS

Clearly, as stated above, Royal Mail’s first priority was to restore service. However, the circumstances surrounding the October national IA meant that the challenges faced by Royal Mail to recover service were significantly greater.

The chart illustrates how Royal Mail’s performance, before the 4 days of national IA in October was performing below the 93% target level – as a result of the general decline in the industrial relations climate, increased localised IA and work to rule activity.

The chart clearly illustrates the steep decline in performance for items posted from 3rd October to 10th October (corresponding with the national IA) and then shows a steady improvement from the 10th onwards. However, unlike the recovery in relation to the IA ending in August, when performance returned to target level within around a week of the various strikes, the recovery from the October national IA took significantly longer.

By Monday 22nd October, 1st Class Retail weekday performance was consistently above 65%. By Monday 29th October, 1st Class Stamped and Meter weekday performance was consistently above 77% and by Monday 5th November performance was consistently above 83%.

Whilst the most significant downturn in quality of service occurred in October and early November, Royal Mail is seeking relief for the entire period of 3rd September to 2nd December 2007. This is because 1st Class Stamped and Meter performance did not reach the 93% target level before the end of this period for a number of important reasons (most of which have been discussed previously in this application and are summarised below):

The nature of the national IA – The national IA in June, July and August took the form of two 24 hour strikes (where only one day’s backlog of mail was built up) and a series of rolling strikes where the ‘breaks’ between the strikes gave Royal Mail the opportunity to recover some of the backlog.

In October, Royal Mail encountered two sets of 48 hour national IA with virtually no opportunity (i.e. a seriously restricted weekend operation) to recover service in

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between. This meant that Royal Mail started the recovery operation with a backlog of at least 4 full days of mail.

On Wednesday 10th October, Royal Mail recorded via its internal performance management reporting procedures a workplan failure of almost 90m items in Mail Centres, Network Hubs and Delivery Office – compared to the national one-day strikes in June and July where:

• 62m items were recorded as failing workplan on Saturday 30th June (the day the first national strike ended)

• 32m items were recorded as failing workplan on 13th July (the day the second national strike ended), and

• 38m items were recorded as failing on Friday 3rd August (the peak day for reported workplan failures during the period of rolling IA).

This figure (90m) did not include mail that still remained uncollected from post boxes, customer premises and Post Office outlets or mail that was held in buffer storage in outhouses. Based on typical October traffic volumes, it is estimated that the starting backlog (taking account of uncollected mail and mail stored in outhouses) on full return to work on Thursday 11th October was around 300m items.

The charts at Annex 28 detail the internally reported level of pipeline failures immediately before, during and after this first wave of national strikes.

Levels of localised IA – The total number of days recorded as being lost in connection with the October national IA was marginally lower than in connection with the June, July and August national strikes - as a result of marginally more people turning up to work on the 4 official national strike days in October than had done so during the June, July and August strikes – as shown in the table below:

Table 4.1 Percentage of people turning up for work on strike days

28/29 June strike

12th/13th July strike

Rolling strikes (1st week 25th-30th

July)

Rolling strikes (2nd week 31st July-7th Aug)

4-6th October Strike

8th-10th October Strike

%age of people turning up for work

13% 14% 17% (average) 16% (average) 18% 18%

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However, during September and October, Royal Mail lost a total of almost 19,000 days to IA outside of the 4 days of national dispute in October - and the timing of when this action occurred is particularly important to Royal Mail’s recovery.

Between the first and second national strikes on 29th June and 12th/13th July only 30 days were lost to unofficial action and this was restricted to two operational units – so this IA did not greatly hinder Royal Mail’s recovery during this period.

Between the second national strikes on 12th/13th July and the start of the rolling strikes Royal Mail lost a total of just over 1,000 days to IA, all in the Oxford Area. So whilst recovery in Oxford was hindered by localised IA, national recovery was not greatly impeded.

In the week immediately following the end of the rolling strikes on 8th August, 309 days were lost to IA in a handful of Delivery Office in South London plus Burslem Delivery Office and Chelmsford Mail Centre. Once again, the level of regional IA did not significantly slow national recovery from this particular strike.

However, in the week immediately following the end of the national IA on 10th October almost 15,000 days were lost to regional IA and this was spread across dozens of operational units – Mail Centres, Delivery Offices and Distribution Hubs. This regional IA significantly lengthened the period of time it took Royal Mail to recover from this particular bout of IA.

Work to rule – Work to rule tactics were demonstrated throughout the IA. However, the extent and scale of these tactics were magnified in the build up to and after the October national strikes, often instigated and encouraged by the national CWU Executive. Many examples of work to rule activity have been given throughout this application ranging from refusing to take up available overtime/scheduled attendance, through to the very detrimental withdrawal of use of private cars on delivery.

Whilst it is impossible to quantify the impact that such work to rule activity had on quality of service performance – as our quality of service surveys are not designed to be sensitive enough to measure the impact of individual performance – the detrimental effect on the standardised measures for collection and delivery are very clear (see Annex 31).

However, the direct and indirect impact (e.g. managers having to forgo routine managerial tasks to carry out collection/delivery duties personally) of such actions is undeniable.

Go-slows – throughout the periods before and after the October national strikes, Royal Mail managers witnessed an escalation of go-slow activity in numerous units. Whilst this is impossible to quantify – without employing industrial engineers to constantly measure the work rate of individuals – it was clear that many employees were working less quickly and less flexibly than they would in normal circumstances.

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Higher levels of sick absence – The level of sick absence undoubtedly increased in the build up to and after the national strikes in October – to levels which Royal Mail had not witnessed for many years.

S ick Absence Levels

4.00%

4.50%

5.00%

5.50%

6.00%

6.50%

7.00%

26/03

/07

09/04

/07

23/04

/07

07/05

/07

21/05

/07

04/06

/07

18/06

/07

02/07

/07

16/07

/07

30/07

/07

13/08

/07

27/08

/07

10/09

/07

24/09

/07

08/10

/07

22/10

/07

05/11

/07

19/11

/07

Network RM Ops Territories

Quarter 1 Quarter 2

Quarter 3

In the first quarter of the Formula Year, pre-strike, sick absence levels averaged 4.8% in Network Operations and 4.54% in RM Operations Territories (i.e. Royal Mail collection, processing and delivery functions).

These averages increased to 5.21% and 4.89%, respectively, in the second quarter.

By the third quarter the levels had increased to an average of 6.05% in Network Operations – meaning 25% more hours were lost to sick leave in the network in the third quarter than in the first. Sick absence in Royal Mail Territories averaged at 5.42% in the third quarter – almost 20% higher than pre strike levels in the first quarter.

It is important to note that sick absence levels hit their peak in the 3 weeks following the national dispute in October and did not return to pre strike levels before the end of the third quarter.

To put these figures in context, Royal Mail Operations employed an average of 5.8m hours per week in the first three quarters of the Formula Year. This 20% increase in sick absence means Royal Mail must find an average of 52,300 additional hours of resource per week to cover the absent posts – or the equivalent of almost 1,4000 full time jobs per week (based on a 38 hour working week).

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This significantly increased level of sick absence, combined with go-slow and work to rule activity reduced the output of Royal Mail’s regular employees32 during and after the October national strikes and thus contributed to the longer recovery period.

Higher traffic volumes – Traffic volumes increase significantly in the build up to Christmas and this ramping up of volumes generally starts after the August Bank Holiday weekend. The chart below shows how volumes increased during this period in 2006-07 (2006-07 was chosen as the volume figures for 2007-08 are skewed by the IA).

Volumes in the first quarter of the Formula Year averaged 361m items per week in 2006/07. This fell to 332m items per week in the second quarter and then increased by 12% to 373m items per week in the third.

This 12% increase in traffic volumes combined with the lower productivity rates described above contributed to the longer recovery period after the October IA.

Managerial resource stretched to the limit – During normal operating periods, managers carry out a number of tasks to ensure that Royal Mail provides the best quality of service to its customers. These tasks include:

• Short, medium and long term manpower planning

• Ensuring compliance to day to day workplan disciplines such as workplan clearance

• Communicating with front line employees about customer issues and engaging them in performance improvement initiatives

• Carrying out quality checks

32 Clearly Royal Mail actually processed much higher volumes than it normally would in the weeks following the October industrial action – but this was due to the interventions made by Royal Mail, i.e. increasing casual/agency employee levels usage and utilising existing Royal Mail managers to handle mail.

Week ly Traffic Volumes 2006-07

300.0

320.0

340.0

360.0

380.0

400.0

420.0

27/03

/2006

10/04

/2006

24/04

/2006

08/05

/2006

22/05

/2006

05/06

/2006

19/06

/2006

03/07

/2006

17/07

/2006

31/07

/2006

14/08

/2006

28/08

/2006

11/09

/2006

25/09

/2006

09/10

/2006

23/10

/2006

06/11

/2006

20/11

/2006

Item

s (m

)

Quarter 3Quarter 2Quarter 1

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• Analysing customer service data to identify opportunities for improvement

• Liaising with upstream and downstream colleagues to optimise Royal Mail’s pipeline.

Clearly, during the strikes Royal Mail managers were stretched to the limit:

• Protecting Royal Mail’s people and assets on strike days

• Trying to maximise customer service performance with the limited resources available to them, i.e. “firefighting”

• Leading the ‘hearts and minds’ communications campaigns

• Planning and deploying the duty changes necessary to support Network 2007.

This meant that some of the standards and disciplines that support high quality of service and that are embedded as ‘day job’ activities for these managers could not be carried out as normal. Inevitably, this contributed to the performance shortfall and helps explain why performance did not fully return to pre strike performance levels in the third quarter of the Formula Year.

4.3 Tail of mail analysis

The table below demonstrates the percentage of mail delivered by day for 1st Class Stamped and Meter mail for the recovery period from the first national strike on 29th June, where Day B indicates the first working day after posting, Day C the second working day etc. This is known as “tail of mail” performance:

Table 4.2: Exclusion period for first national 24 hour strike (29th June)

Target = 93.0% by Day B %Delivered By Day B

%Delivered By Day C

%Delivered by Day D

% Delivered by Day E

Thursday 28th June 9.2% 92.1% 95.7%

(target level

achieved by Day D)

Friday 29th June 25.6% 51.5% 88.8% 97.2%

Monday 2nd July 68.7% 92.0% 98.5%

Tuesday 3rd July 73.6% 95.8%

Wednesday 4th July 82.5% 97.9%

Thursday 5th July 87.6% 98.1%

Friday 6th July 93.0%

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Note: Saturdays and Sundays have been excluded as sample sizes are too small, resulting in excessively wide confidence limits. As an example 90.3±5.6% of 1st Class Stamped and Meter items posted on Saturday 7th July received Day B service, 99.5±1.3% were delivered by Day C. Similarly, 85.7±11.0% of 1st Class Stamped and Meter items posted on Sunday 8th July received Day B service and 97.4±4.6% were delivered by Day C.

The table shows that 92% or more of 1st Class Stamped and Meter mail received Day C (instead of Day B) performance33 and that performance returned to target level by Friday 6th July. This table demonstrates that Royal Mail followed the first in/first out approach agreed with Postcomm wherever possible – if Royal Mail had not followed this approach then mail posted on Thursday 28th June and Friday 29th June would have had a significantly longer tail of mail than shown above.

Full tail of mail performance for the second national strike and rolling strikes, for all quality of service targeted products, is provided at Annex 29. Again, for 1st Class Stamped and Meter mail the key points to note are:

• Following the second national 24 hour strike on 12th/13th July more than 94% of items received Day C service

• Tail of mail performance was more erratic during the period of the rolling strikes as the CWU planned effect of this action was to ensure mail made a ‘stop/start’ journey through the pipeline

• From Monday 6th August more than 93% of this mail received Day D performance

• Day B performance returned to target level by Wednesday 15th August.

In relation to the October national strikes, the table below illustrates that Royal Mail handled, wherever possible, mail on a first in first out basis during and after the strikes by showing the date of delivery for items posted during and immediately after the national strikes34:

Table 4.3: Tail of Mail performance for October national strikes

Date of posting35 Day by which 50% of 1st Class

Day by which 90% of 1st Class

Date by which 93% of 1st Class Stamped &

33 Except for items posted on Friday 29th June. This is because collection operations did not restart until Saturday 30th – at which point most Business premises were closed. Meaning most Business mail that should have been collected on Friday 29th June could not be collected until Monday 2nd July.

34 This table in shown in a different format to Table 4.2. This is due to the nature of the October national industrial action, i.e. effectively 6 consecutive days of interrupted service. So for items posted on 4th October, i.e. the first day of this phase of the national dispute, the first real opportunity for delivery was Wednesday 10th October (Day H) and hence the tail of mail is significantly longer. This table, therefore, provides a more simplistic representation of the tail of mail – although full details are available at Annex 30.

35 Note: Saturday and Sunday postings are not shown as sample levels are very small, resulting in wide confidence limits that could be misleading.

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Stamped & Meter items were delivered

Stamped & Meter items were delivered

Meter items were delivered

Thursday 4th October 11th Oct 16th Oct 17th Oct

Friday 5th October 12th Oct 17th Oct 17th Oct

Monday 8th October 12th Oct 17th Oct 19th Oct

Tuesday 9th October 12th Oct 17th Oct 18th Oct

Wednesday 10th October 13th Oct 18th Oct 19th Oct

Thursday 11th October 13th Oct 18th Oct 20th Oct

Friday 12th October 15th Oct 18th Oct 19th Oct

Monday 15th October 17th Oct 18th Oct 19th Oct

Tuesday 16th October 17th Oct 19th Oct 19th Oct

Wednesday 17th October 18th Oct 20th Oct 20th Oct

Thursday 18th October 19th Oct 20th Oct 22nd Oct

Friday 19th October 20th Oct 23rd Oct 23rd Oct

Monday 22nd October 23rd Oct 25th Oct 25th Oct

Tuesday 23rd October 24th Oct 25th Oct 25th Oct

Wednesday 24th October 25th Oct 26th Oct 26th Oct

Thursday 25th October 26th Oct 27th Oct 27th Oct

Friday 26th October 27th Oct 29th Oct 30th Oct

This table demonstrates that 50% of mail posted on 4th October (due for delivery on 5th October) was delivered by 11th October, 90% was delivered by 16th and 93% (the target performance level) was delivered by 17th October.

Had Royal Mail not attempted to process mail on a first in first out basis, the table above would show that items posted after the strike – from Thursday 11th October – were being delivered before items posted during the strike. This is clearly not the case.

A full set of Tail of Mail charts relating to the October IA is provided at Annex 30.

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4.4 Benchmarking with previous industrial action

Royal Mail has attempted to benchmark performance during the Formula Year with previous IA. However, in recent Royal Mail history, there have been no incidents of IA which are directly comparable.

The most significant disputes over the period of the last 10 years happened in the years 1996/1997 and 2003/04.

However, Royal Mail cannot draw any comparative conclusions from this information as:

• The commercial environment was different (i.e. in 1996/97 Royal Mail held a legal monopoly over the majority of domestic letter mail services it provided and in 2003/04 Royal Mail was regulated but the UK domestic market had only partially been liberalised), so Royal Mail had different priorities and responded differently to each strike;

• Royal Mail’s service specifications were different (e.g. in 1996/97 Royal Mail had a two deliveries per day operation);

• Royal Mail’s operation was different and less efficient;

• Royal Mail’s methodology and approach to quality of service measurement was not exactly the same as now;

• The reasons for, duration of and strategy/tactics for handling each dispute were different.

4.5 Comparison with previous Force Majeure claims

The table below summarises the impact and recovery period that Royal Mail has claimed for Force Majeure incidents that have previously impacted on performance. Whilst the details in this table provide a form of benchmark it is important to note that they can not be directly compared with the IA in 2007/08 because:

• The incidents were all significantly smaller than the impact of the national strikes, i.e. lasted a shorted period of time and generally affected only a single unit;

• Recovery is quicker because employees are more motivated to clear the backlog and hence will work faster and more flexibly than during the recovery from an industrial dispute;

• Royal Mail does not restrict the amount of available overtime after a Force Majeure incident (as it did after the 2007/08 strikes);

• Royal Mail can divert mail to other sites that are not affected by the Force Majeure event (not feasible during a national strike);

• Royal Mail can call in employees from other sites to help clear the backlogs (not possible during a national strike);

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• Royal Mail can call in managerial volunteers from other sites to help clear the backlogs (in higher concentrations than during a national strike, as they are not dealing with problems in their own Areas);

• The Force Majeure incident may actually prevent customers from posting mail in the area (e.g. severe weather keeps people at home) so the backlog of mail may be smaller.

Table 4.4 Force Majeure Comparisons

Incident Scale Exclusion period claimed for 1st Class items

Belfast Mail Centre evacuation July 2004

Mail Centre evacuated from 2000hrs on 7th to 1500hrs on 8th July

BT posted 7July BT delivery 8-10 July

Belfast Mail Centre evacuation August 2004

Mail Centre evacuated 0250hrs-0505hrs 19th August

BT delivery 19-20 August

Carlisle Flooding January 2005

Disruption to collection and delivery services in certain areas of Carlisle from 8th to 12th January

CA posting and delivery 8-12 January

Severe Winds affecting Network Transport January 2005

Disruption to mail travelling long distances by air on 6-8 Jan, 11-12 Jan, 17 Jan and 19 Jan

1 day claimed for each day affected by bad weather

East London evacuation March 2005

Mail Centre evacuated from 2130hrs 3rd March to 0600hrs 4th March

E & SE posted 3-7 March E & N delivered 4-8 March

East London evacuation June 2005

Mail Centre evacuated from 1730hrs 13th June to 1500hrs 14th June

E posted 13-14 June E & N delivered 14-15 June

London Terrorist Attacks July 2005

Shut down of all collection, processing and delivery in central London from morning of 7th July to 0600 8th July

All London PCAs posted on 7th July All London PCAs delivered for 8th July

East London evacuation July 2006

Mail Centre evacuation from midnight to 0830hrs 13th July

E & N posted on 13th July

Flooding in Sheffield and Hull 2007

Severe flooding on 25th June resulted in evacuation of Hull Mail Centre for approx 15hrs and Sheffield Mail Centre for more than 48hrs

Sheffield posted and delivered 25th 26th and 27th June – although FM claim may have been longer if national Industrial Action had not commenced on 28th June Hull posted and delivered on 25th and 26th June.

4.6 Comparison with Royal Mail Christmas Performance

In the build up to Christmas Royal Mail handles significantly more mail than it does during any other period of the year. Whilst Royal Mail significantly increases the level of resource available during Christmas it is not physically possible to provide the same quality of service as the rest of the year. As explained previously, there is a finite supply of human, vehicle, building and equipment resources that Royal Mail can call upon during this period.

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In recognition of this, the Christmas period is excluded from Royal Mail’s quality of service Licence targets. In addition, Royal Mail publishes last posting dates for Christmas that extend beyond the normal year-round Day B and Day D specifications for 1st and 2nd Class mail, respectively. Again, this recognises that normal quality of service levels can not be achieved at Christmas when traffic volumes are considerably higher.

The table below compares year round traffic volumes and quality of service levels with Christmas traffic volumes and quality of service for 2006/07. These figures clearly demonstrate a link between increased traffic volumes and lower quality of service (although it should be noted that many other factors such as weather also impact on service).

Whilst we cannot make a direct comparison between Christmas and incidents of IA – the table gives some indication of the level of service you may expect following IA when Royal Mail commences processing the backlog of mail.

Table 4.5 Christmas Comparisons

Average Weekly Mail Volumes

Quality of Service

2006/7 full year-excluding Christmas period

Total 348m 1st Class 110m

Full year 2006/7 excluding Christmas

94.0%

Weeks commencing 4th, 11th and 18th December 2006

Total 495m (+42% ) 1st Class 170m (+55%)

Christmas period 4th -31st December

56.9%

Whilst traffic volumes have a key influence on quality of service performance there are many other factors which also contribute (e.g. weather) so the results shown in the above table should only be used as an indicative comparison. That said, we can see that a 55% increase in 1st Class traffic leads to a significant decline in quality of service.

4.6 Collection & Delivery Standardised Measure Performance

Royal Mail delivers to over 27m delivery points per day – served by approximately 68,000 delivery routes. Similarly, Royal Mail collects from around 116,000 post boxes and 14,600 Post Office outlets every day – using the equivalent of approximately 9,000 full time collection drivers.

Clearly, on days of national IA, the performance of a percentage of collection points served each day and of the percentage of delivery routes completed each day is severely impacted as Royal Mail does not have sufficient contingency resource to cover these duties.

The impact of the national IA is clearly seen on the day by day performance charts at Annex 31. Whilst these charts show a considerable improvement in performance of these standardised measures on the first working day after a strike, it is clear that performance does not immediately return to pre-strike levels.

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On the days immediately following a strike:

• There was a considerable increase in the amount of indoor sortation and preparation work that had to be completed before postmen and women could start the outdoor part of their delivery (this was particularly true for rolling/consecutive day strikes)

• Striking employees had to participate in a return to work briefing

• Productivity levels were lower than normal.

These factors resulted in the outdoor part of the delivery starting later than normal and this, combined with the additional weight that had to be carried on delivery resulted in delivery ‘cut-offs’36 – causing part failures of the delivery routes completion standard.

In addition, Royal Mail encountered higher levels of sickness absence on the days following IA and significant levels of go slow and work to rule activity – both of which resulted in higher than normal performance failures. Examples of work to rule activity affecting collection and delivery performance include refusal to take up available overtime and refusing to use private cars on delivery.

For these reasons, Royal Mail is seeking relief during this period not only for the national strikes days but for the day immediately following the strike. Royal Mail is also seeking direct relief for the incidents of localised IA outside of these specific days which can be directly attributed to transformation activity, where these have also directly affected the collection and delivery measures (as set out in Annex 6).

36 A delivery ‘cut-off’ is where the delivery postmen has reached the end of his/her shift without having completed their delivery round – so they return to the office with their undelivered mail (which is then delivered the following day).

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5. CHAPTER 5: SUMMARY AND CONCLUSIONS

This Chapter draws together the various aspects of this application as well as setting out Royal Mail's conclusions regarding the relief being sought. It confirms that, in Royal Mail's reasonable opinion, this application meets the criteria set out in the June letter.

5.1 Background to the application

The competitive environment

The UK postal market is becoming increasingly competitive. There are currently nineteen licensed operators, including Royal Mail. Competition is especially strong in the business and bulk mail markets. Royal Mail must adapt to changes in the market in order to survive and to continue to meet its Licence obligations, including the one-price-goes-anywhere universal service. It must drive forward a substantial programme of change to become innovative and efficient and able effectively to compete in the market. Royal Mail is currently hampered by outdated plant and equipment, and has in place inflexible working practices that hinder improvement in performance.

Royal Mail's financial position

These market and trading developments must be seen against the worsening of Royal Mail's current and likely future financial position. The overall mail market is declining, the take up of Access has been greater and sooner than expected and customers are down trading to lower class products (with lower profit margins for Royal Mail). The loss of major contracts also has implications for Royal Mail's revenues and ongoing profitability, a factor already significantly impacted by its high pension contributions.

In order to meet the challenges that it is facing, Royal Mail needs to transform its business operations. The changes required as part of this transformation will affect every individual in the Letters business, through the introduction of new machinery and technology, product development, and changes to working practices, pensions, pay and terms and conditions.

The finalisation of the financing package with government has enabled Royal Mail to start these transformation activities. This funding package includes a loan facility of £900 million for the Letters business, as well as a shareholder loan of £300 million, enabling Royal Mail to draw down £1.2bn to cover the costs of modernisation to allow it to compete in the fully liberalised UK postal market with other bulk mailers. These loans are made on commercial terms and will need to be repaid out of profits which can only be made through improvements brought about by the transformation programme.

As Postcomm is aware, and as considered in more detail in Chapter 1, Royal Mail also relies on the revenue that can be earned under Licence Condition 21, assuming that relevant quality of service standards are met, to help fund transformation activities and to contribute towards the ongoing financial viability of Royal Mail while it undertakes such activity.

Approach to Postcomm

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Royal Mail's Board and its Directors considered that, taking into account the adverse views of the CWU to the measures required to progress transformation activities and the likely impact on the annual discussions on pay and conditions, there was a real possibility of IA. The company’s directors were so concerned that undertaking transformation activities without endeavouring to mitigate the likely financial consequences of any resultant IA potentially would not be a proper discharge of their duties, that they approached Postcomm early in 2007 to discuss the regulatory implications of IA arising as a result of transformation activities.

Royal Mail addressed two specific categories of adverse financial consequence: (i) under certain of the provisions of the Bulk Mail Compensation Scheme, Royal Mail is liable to compensate bulk mail customers for failures in performance; and (ii) under the current price control, the customer service quality factor within the control (the so-called "C factor"), an automatic adjustment of up to 5% is made to allowed revenue for specific services if performance targets are met.

Postcomm's response

Postcomm's response is set out in a letter to Adam Crozier dated 21 June 2007 (see Annex 34). Postcomm indicated that it was minded to decide (in the absence of exceptional circumstances) and in advance of any quality of service failure resulting from IA occurring due to transformation activities, that it should allow Royal Mail (a) not to pay compensation to bulk mail customers and (b) to earn the allowed revenue which is contingent on the C factor, in either case as if the quality of service failure had not occurred. Such financial relief would be granted should the Criteria be met. To reiterate, these Criteria are that Royal Mail demonstrates that the IA (for which it is seeking relief) (1) arose as a result of the carrying out of a transformation activity and not for some other reason, and (2) has a direct causal link to any quality of service failure. Royal Mail demonstrates in this application that these Criteria have been met.

5.2 Background to the industrial action

Transformation discussions were part of the last price control negotiations with Postcomm and its advisors, LECG. In September 2005, Royal Mail submitted "Royal Mail's Integrated Operational Plan” to Postcomm. This Plan set out individual initiatives underpinning the revised strategy to transform and modernise the business and was key to the 2006 price control settlement.

Royal Mail held two Strategic Forums, in February and March 2007, at which it explained to the CWU the operational strategy of transformation and modernisation, the financial position and the challenges facing the business, i.e. its “business plan”. The CWU tabled its pay claim at the March Strategy Forum.

During the annual pay negotiations that followed, Royal Mail made it clear to CWU representatives that pay increases could only be funded through modernisation and improved efficiency, flexibility, productivity. They must therefore be conditionally linked to the implementation of transformational change. This would create the necessary flexibility required to meet the challenges of an increasingly competitive market place and the requirements of the current price control disciplines.

By May 2007, the CWU had indicated its intention to ballot members regarding strike action.

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5.3 The occurrence of and reasons for industrial action

Overview of Industrial Action

Industrial action principally consisted of: two 24 hour national strikes (29th/30th June and 12th/13th July); a series of rolling strikes during the period 25th July to 8th August; and two 48 hour national strikes (4th-6th and 8th-10th October). In addition, the highly contentious industrial relations climate led to more localised disputes and IA.

In total, the equivalent of 628,614 working days were reported as being lost to IA between 4th June and 2nd December 2007.

The first 24 hour national strike affected all UK operations, i.e. all 121 postcode areas and all parts of Royal Mail's pipeline (collection, processing, network and delivery operations) were effectively shut down for a period of 24 hours. The action included any attendance or shift that began at or after 0300hrs on Friday 29th June and before 0300hrs on Saturday 30th June. The second national strike also affected such operations. This second strike included the whole of any attendance or shift that began at or after 1900hrs on Thursday 12th July and before 1900hrs on Friday 13th July.

Following the two 24 hour national strikes, the CWU adopted different tactics and developed an approach involving a series of rolling strikes from 25th July to 8th August whereby employees working in separate components of the pipeline took action on different days.

The two two-day national strikes in October again affected all UK operations, i.e. all 121 postcode areas and all parts of Royal Mail's pipeline. The first strike included the whole of any attendance or shift that began at or after midday on Thursday 4th October and before midday on Saturday 8th October. The second strike included the whole of any attendance or shift that began at or after 0300 hours on Monday 8th October and before 0300 hours on Wednesday 10th October.

Whilst there was a break between these two strikes, the break was over the weekend when only a small proportion of Royal Mail employees are scheduled to work – thus allowing little opportunity for any clearance of the backlog between the two strikes. This meant that Royal Mail and its customers in effect experienced almost a full week of lost service (from the stoppage of the collection operation on Thursday 4th October until the restart of the delivery operation on Wednesday 10th October).

In addition, Royal Mail also encountered regional IA, linked to transformation activity, in various parts of the country.

Even on days which were not subject to strike action and in particular following strike days, Royal Mail was subject to a worsening climate of industrial relations, which adversely impacted on its ability to move to business as usual once IA was over, particularly before and after the October strikes.

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Reasons for the industrial action

The ballot issued by the CWU for the national IA refers to “Pay Conditions and Royal Mail’s Business Plan”. There is no document called “Royal Mail’s Business Plan”. However, from the sequence of events, discussions that took place and documentation, it is clear that the IA related to Royal Mail’s plans for the modernisation and transformation of the business (see further section 2.3 above).

5.4 Attempts to avoid and subsequently manage the impact of the strikes

Attempts to avoid the industrial action

Royal Mail followed and exhausted its Strategic Involvement framework and considers that it did everything it reasonably could, taking into account its regulatory obligations, to find a solution to the IA both before it occurred and subsequently, including: restructuring the original pay offer; moving pay negotiations to ACAS on 20th June; jointly agreeing to a ‘period of calm’ in which both parties refrained from taking action whilst an agreement was sought; inviting the TUC to become involved in August; holding further unsupported talks with the CWU from 5th September and then further talks with the involvement of the TUC from 26th September, with 17 days of talks including 26 hours over one weekend alone.

In addition, Royal Mail constantly monitored the possibility of a challenge to the lawfulness of the action in light of all the wider circumstances ultimately it was considered appropriate to apply for a High Court injunction to prevent the further IA planned to commence on 15th October, that application was successful.

A deal was finally reached with the CWU on 12th October, endorsed by the CWU Executive on 22nd October and accepted by the members in a vote in November.

Corporate Priorities and delivery in the event of industrial action

Royal Mail applied its Corporate Governance procedures to the IA. These involve the setting of Corporate Priorities by Royal Mail Holdings Board. The Corporate Priorities (which were discussed with Postcomm and with BERR) are set taking into account Royal Mail's regulatory obligations and the needs of its customers and aim to maximise the level of service provided during IA, based on the resources available.

On receipt of the required 7 days prior notice of an official strike, Royal Mail was able to apply its operating contingency plans.

During the two national one-day strikes in June and July: managerial volunteers were deployed to maintain key network routes, collect from key sites, deliver Special Delivery mail and operate automated sorting equipment in Mail Centres; Mailsort 2 and 3 was accelerated through the pipeline to be delivered in advance of the strikes where possible; and agency and casual employees were recruited to help clear the backlogs where possible.

During the rolling IA between 25th July and 8th August, the same mitigating action was taken and more agency and causal workers were drafted in to assist.

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During the two national 48 hour strikes in October, in addition to the action outlined above, Royal Mail managers endeavoured to collect regularly from high volume boxes to prevent these boxes overflowing and posters were placed on each postbox recommending that customers take their mail to the nearest post office, where the likelihood of a collection was much higher.

In order to collect and hold the backlog of 6 days of mail as a result of the October national strikes (where existing infrastructure could only hold 2 days worth), Royal Mail invested in the short term lease of 7 additional buildings, using them to store and process mail manually. Royal Mail also invested in cardboard containers to hold the additional mail and accelerated the release of 32,000 York containers that were already in store or in production to support the Christmas operation. In addition, Royal Mail subcontracted road services and employed additional rail and air services to trunk the backlog of mail. Alongside managerial volunteers, casual and agency employees that had been recruited to support the Christmas operations were brought in early and additional resource was released to accelerate and increase the level of recruitment.

Overall, Royal Mail considers that it secured the maximum level of resource available and deployed it in such a way that optimised achievement of its Corporate Priorities. Up to and throughout the IA, Royal Mail kept Postcomm up to date.

5.5 Impact of the strikes on quality of service

Scheduled services and standardised measures

The Annex to Condition 4 of Royal Mail’s Licence sets out the scheduled services to which quality of service scheduled standards. There are eight groupings of scheduled services to which the scheduled standards apply as well as 4 standardised measures. For 3 of these 8 groupings, (bulk first, second and third class), failure to bring the scheduled services within the target performance bands leads to payment of compensation to bulk mail users.

Not all of these groupings figure in the measures considered when taking into account the C factor adjustment under the price control. This applies to: Retail First and Second Class, Standard Parcels and European International Delivery. In addition, performance against the standardised measures (postcode area target, percentage of collection points served each day, percentage of delivery routes completed each day and percentage of items delivered correctly) is also taken into account when making the C factor adjustment.

Impact of the industrial action on Royal Mail's performance as against targets for scheduled services and standardised measures

The most obvious impact of the IA occurred on the days when strike action (whether it was the 24 hour or two 48 hour national strikes or the targeted action removing a specific part of the operational pipeline, as such action in practice impacts the whole network) took place. A normal service on those days was not possible. Delayed delivery was inevitable as the pipeline was not functioning as anything like normal (or indeed, above performance, taking into account Royal Mail's previous performance against targets).

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The rolling strike action was in Royal Mail’s view more disruptive37 while it was taking place than the single one-day and two-day strikes, as the dispute took place over a much longer period of time and mail could not follow a continuous flow through the pipeline (i.e. often making a stop-start journey because of nature of the strike).

Chapter 2 and Annex 16 show that during the 15 day rolling strike period a total of 13 days were directly affected by some form of national IA. If all key processes are disrupted over a rolling period of days and weeks, the impact on quality of service standards is devastating as backlogs of mail build up across the pipeline.

Royal Mail is therefore seeking adjustments to the recorded results for scheduled services (Retail First Class, Retail Second Class, Bulk First Class and Bulk Second Class ) and the standardised measures of percentage of collection points served each day and percentage of delivery points served each day. In the case of the scheduled services, Royal Mail’s application is based upon the removal from the quality of service performance results of all items posted on strike days and in the period affected by IA . For the collection and delivery standardised measures, Royal Mail is seeking the removal of all performance results on the day of national strikes and the day after.

Where regional IA occurred at particular delivery offices or mail centres, in many cases this effectively closed down those offices or mail centres for the days that the action occurred and continued (as detailed in Annex 6).

Whilst the impact of regional IA is small in comparison to national disputes, they do however have an immediate bearing on Royal Mail’s ability to meet the collection and delivery standardised measures: on each day that a delivery office or mail centre is closed because of IA, the licence standard for 99.90% of all collection points and of all delivery routes to be served / completed each day cannot be achieved. Royal Mail is therefore seeking adjustments to the recorded results of those measures to exclude the collection / delivery points affected by regional action on the relevant days.

Before, during and after the strikes, another significant factor affecting recovery and quality of service, particularly around the October strikes, was the exceedingly poor industrial relations climate and the action taken as part of the CWU's Doing the Job Properly 'work to rule' campaign.

This included: refusing to take up available overtime; taking part in unofficial union meetings; withdrawing use of private cars on delivery; poor take-up of scheduled attendances; go slows; continued refusal to cross picket lines or to accept mail diversions from other units; refusing to provide the normal levels of coaching and support for agency/casual employees; a general lack of co-operation and flexibility; taking excessively long to carry out administrative tasks such as weighing pouches and/or signing in; taking meal reliefs and breaks at the exact time specified on job description; and putting excessive administrative demands on managers, for example requesting to see contracts of employment and or union agreements. Sick absence levels also increased considerably.

37 Although less damaging to quality of service than the two 48 hour strikes.

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Adding to the delays was post-strike action aimed at working with the employees to aid recovery, such as return to work briefings designed to counteract the negative climate of industrial relations and work to rule tactics outlined above. As Postcomm will be aware, Royal Mail took the decision to limit overtime to the normal levels at each office. As noted above, in many offices, staff declined to take up the planned overtime that was available in any event.

5.6 Conclusions

Royal Mail considers that this application meets the Criteria and accords with the process set out in the June letter and the annex to that letter.

On the basis that Royal Mail has demonstrated that the IA which forms the basis of this application arose as a result of carrying out transformation activities and for no other reason38 and that this had a direct causal link to quality of service failures, Royal Mail is seeking relief for an estimated £79.2m in compensation that would otherwise be payable under the Bulk Mail Compensation Scheme directly to bulk mail users and £81.0m in C-Factor adjustment.

Royal Mail is not aware of any exceptional circumstances that occurred during the period in question that would cause Postcomm to revisit its decision that it is minded to allow Royal Mail not to pay compensation to users of bulk mail services and to earn revenue which would normally be contingent on the C factor, as if, in either case, quality of service failures had not occurred, where those failures resulted from IA arising as a result of transformation activities.

38 Except in the case of the described Force Majeure incidents that can not be separately quantified.