1.3 National Savings has for many years provided savings products for UK citizens, even for those with very little money to save. National Savings might, therefore, be thought to serve a socially useful function. Although in the past National Savings had been a very important source of funding for Government, in its recent history the Treasury had not regarded it as playing a critical part in Government funding. If the prime role of National Savings was its social functions, then its future strategy might be based on providing those functions at minimum cost, but if there were also financial arguments for retaining National Savings, then a different strategy might be appropriate. The strategic review therefore needed to consider the ways in which National Savings might be regarded as a source of value to the taxpayer.
1.4 The review, completed in January 1997 by Corporate Value Associates, concluded that the added value of National Savings for the taxpayer could be measured by the extent to which funds are raised at lower yields than the alternative of issuing gilt-edged securities, taking account of the administration costs and tax foregone on some National Savings' products (Appendix 2). National Savings expects to achieve some £300 million of added value during 1999-2000.
1.5 In the light of the strategic review, National Savings decided to base its business strategy not on cost minimisation but on maximising value creation. This has meant pricing products competitively both in relation to gilts, to provide value directly to taxpayers, and in relation to other savings institutions, to provide value to customers and thereby ensure the continuing loyalty on which sustainable taxpayer value depends. Seen in that light, control of costs became just one way of improving the value National Savings could add. The review considered that there were areas in which further value could be added:
a) Particular products are administered at each of the three sites. As there was no common computer system for all savings products, customers who hold a range of investments could only complete transactions or make enquiries about different products by going to separate contact points. In addition, National Savings could not collate and analyse customer information to help market products as effectively as it might. Against a background of fragmented information on its customers, National Savings had in the past been slow to react to changes in the market.
b) National Savings' operations were too dependent on paper-based systems requiring high staffing levels and, where systems had been automated, the technology had become out of date. Investment in operations would reduce costs and improve service.
1.6 In 1995, National Savings had started to address these issues through a Business Process Re-engineering project designed to improve customer service while reducing the cost of managing the business. This would be achieved through a fundamental re-design of operational processes, supported by the implementation of new IT systems.
1.7 As a result of the strategic review, however, National Savings took two key decisions. First, if it was to compete within an increasingly competitive financial services market, strategic and commissioning functions needed to be separated from operational services. A core of 130 staff based mainly in London were made responsible for liaison with the Treasury on funding requirements, the design and marketing of products to deliver the required level of funding, and the management of the operational service. The remaining 4,100 staff would provide the operational delivery of sales, payments and after-sales along with supporting transactions and a customer service.
1.8 Second, National Savings considered that the private sector could help to enhance added value to both taxpayers and customers by improving operational delivery. A private sector partner could provide substantial investment to deliver the benefits expected from the business process re-engineering project, improve customer service and consolidate the fragmented database of customer information such that National Savings would be in a better position to market products sooner and more effectively. A key difference was that the private sector also offered the prospect that staff could be re-deployed on third party work. In March 1997, National Savings launched a search for a private sector partner, which resulted in the appointment of SBS to take on and run the operational service.