Drastic surgery at Consignia

Consignia's once profitable businesses are losing £1.5m a day

By Jeff Randall BBC business editor

The shake-up at Parcelforce is the first part of a three-pronged attack by Consignia's new chairman, Allan Leighton, to drag the former Post Office back into profit

Drastic surgery is also needed at the Royal Mail and the post-office network. When the overhaul is complete, about 40,000 jobs will be lost.

The demise of the Post Office from a company that made £2.5bn post-tax profits in the 1990s to a basket case in 2002 is a story that will inevitably form the basis for business school studies in how not to run a company.

Broken piggy bank

Those seeking the culprits need look no further than government, management and the unions.

Parcelforce has been a massive loss-maker and...came within a whisker of being closed

Throughout the 1990s, when the Post Office's monopoly services were making bumper profits, the Treasury used the business as its private piggy bank - to be raided at will.

So not only was the company paying tax, it was also forced to submit a special dividend. In some years, that meant the Post Office was paying government £1m every day.

Some of this money should have been reinvested in the business, developing new technologies and updating plant and equipment.

Instead the cash was sucked up by the state, never to be seen again. This wasn't a problem while the Post Office had a tight monopoly, but once competition began to appear, the roof fell in.

Poor strategy

Management must also shoulder its share of the blame.

The Post Office had remained untouched by the so-called Thatcher revolution

Eager to prove it could develop new streams of income, it poured resources into the parcels business where aggressive commercial companies were already operating.

Good money was thrown after bad to no effect.

Parcelforce has been a massive loss-maker and I understand it came within a whisker of being closed by Mr Leighton's review.

Finally, there are the unions. Faced with weak management, they persisted with working practices that made clear the Post Office had remained untouched by the so-called Thatcher Revolution.

More interested in preserving jobs than forcing up wages, the unions condemned the company to employing a bloated but badly paid and poorly motivated workforce.

Branding blunder

Fearing a Railtrack-style debacle, the government has given full backing to Mr Leighton to push through what ever is necessary to restore Consignia's credibility and profitability.

Compulsory redundancies will be kept to a minimum

Early on the chopping block will be the name Consignia, introduced a year ago at a cost of more than £1m.

Widely derided in the City of London, mocked by staff and hated by customers, the name means nothing to anyone and everything to no-one. It's one of the reasons why the company's sense of purpose has been lost in the post.

Another casualty will be up to 3,000 urban post offices as small units are "merged" with larger outlets.

One-off chance

Once the job review process has been completed, I expect Consignia to be rebranded the Royal Mail which is still one of the strongest brand names in British business.

Consignia's full-year results due out in May will be catastrophically bad. They represent a one-off opportunity for Mr Leighton, who used to be chief executive of Asda, to clear the decks.

After first half losses of £281m, the 12-month loss could be as high as £700m. That's why Consignia needs to make cost cuts of £1.2bn annually.

Compulsory redundancies will be kept to a minimum. Consignia is preparing one of the most generous severance packages ever offered by a state-owned company.

In addition the company has a high turnover of staff (about 20% a year at Parcelforce), so as employees leave of their own accord, they will not be replaced.