The Post Office should become humbler and slimmer

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Out of a rich selection, the Post Office may be the business with the worst reputation in the UK. A state-owned limited company, it was given £2bn to transform itself after it was separated from Royal Mail in 2012. It failed dismally, blundering into the Horizon scandal and prosecuting innocent sub-postmasters in its branch network.

The Post Office is now a managerial ghost ship, with its crew of executives leaving. Nick Read, chief executive, resigned on Wednesday, having already stood back to prepare for the next phase of the Horizon inquiry, starting next week. From this wreckage, a business that still relies on government funding must be restored to stability.

Would you take the job? The man who has (against the advice of his wife), is Nigel Railton, former chief executive of the lottery operator Camelot. As the Post Office’s interim chair, he has to restore public trust, make a bulging, bureaucratic organisation work better, and provide a new deal to the postmasters in its 11,500 branches. It is an intimidating agenda.

Railton has launched a strategic review to decide how the Post Office can shed the worst aspects of its legacy and move on. It made a statutory loss of £76mn last year after writing down assets, and its balance sheet is not pretty. He somehow has to convince the Treasury that it will not be throwing good money after bad by handing out yet more investment capital.

The answer is fairly clear: the Post Office must become a humbler organisation, serving its local postmasters better rather than wasting money by throwing its weight around from London. It still behaves more like a state-owned company than a private franchise business, with too many management layers, and plenty of debilitating indecision and inefficiency. The results speak for themselves.

Change will be painful. It has limited prospects of raising its revenues substantially. Postmasters can now work with parcel delivery services such as Amazon as well as Royal Mail, but the decline of letters is inexorable: its mail revenues fell by 13 per cent last year. It cannot rely on Royal Mail to help it out under the new ownership of Czech billionaire Daniel Křetínský.

The Post Office receives about £200mn annually from 30 banks and building societies in return for offering services such as cash deposits and withdrawals on their behalf as their branches close. It would like to double this sum in return for doing more, but that would require the Post Office to have a decent computer system to interface with those of banks.

It lacks the technology, to put it politely. Horizon was a disaster and the mooted replacement is not much better. It was due to be in place by this year at a cost of £180mn: the latest cost estimate is £1.1bn and there is no sign of it being ready. Meanwhile, the Post Office still employs 1,270 people in 117 branches it runs directly and another 800 in cash handling operations.

The result is that the business is weighed down by its central costs and unable to reward entrepreneurial postmasters highly enough for working hard and being the face of the business. They received 45 per cent of its revenues last year, well below the share they could expect were the Post Office an efficient franchise operator.

The Post Office is more complex than Camelot but there is quite a gap between its 3,600 staff and the 1,000 needed by the latter before its lottery contract ended in February this year. If the Post Office franchised its directly-run branches and outsourced some operations, it might be able to share more with postmasters while weaning itself off government subsidies.

Such action would be painful and the CWU union, which represents counter and supply chain staff, would not take it lightly. But it is obvious that the Post Office cannot carry on as it has. This would not only be a waste of public money but place at risk a branch network that is vital to many communities as shops and banks steadily disappear from local high streets.

Nine of out 10 people in the UK live within a mile of a Post Office branch, and nearly a third of small and medium-sized businesses visit one weekly, often to deposit cash. Although the organisation has struggled to operate effectively in its London hub, it is too embedded in British society to fail.

The Horizon inquiry is delving into the Post Office’s past failures, but it needs to have a future too. Whether it remains in state hands or becomes a mutual owned by postmasters, as some have suggested, one thing is essential. It has to become a decent business.

john.gapper@ft.com