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Executive Summary

The aim of this study is to provide an in-depth analysis of Portmore Insurance Broker's (Sussex) management of the payroll service supplied by Sussex Payroll Services, and look at methods to improve the current management of operations. The method employed in the study was to analyse the activities and associated risks, demonstrate how the company manages the outsourcing activity, evaluate the factors influencing Portmore Insurance Broker's outsourcing decision, and evaluate the strategic and operational implications of the outsourcing decision. The results of the study showed that there were several areas with room for improvement in the management of the outsourcing activity, and that increasing the numbers of managers involved in this process, keeping track of the service and periodically comparing it to services offered by other suppliers, and keeping another supplier pre-defined. To conclude, various things should to be taken into consideration in order for the service to continue working effectively, and improvements should be made to avoid the possibility of the service interruption.

Key words: Outsourcing, payroll, service levels agreements, management

Contents
Executive Summary................................................................................................................................. 1 Introduction ............................................................................................................................................ 3 Analysis of the outsourcing issues ......................................................................................................... 4 The outsourcing activity...................................................................................................................... 4 Associated risks ................................................................................................................................... 5 Critically evaluate the factors influencing the companys outsourcing decision ............................... 6 Demonstrate how the company manage the outsourcing activity .................................................... 6 Evaluate the strategic and operational implications of the companys outsourcing decision ........... 8 Recommendations and implementation plan ........................................................................................ 9 Conclusion ............................................................................................................................................. 10 References ............................................................................................................................................ 11

Introduction
Outsourcing payroll reduces a company's effort spent on non-core activities, therefore increasing the amount of energy focused on revenue generation or other activities to generate company growth. (Talloo, 2008). Some motivation to change company's structure to not having payroll in-house, and the decision to outsource, is the companys intention to save on transaction costs. (Williamson, 1975) Portmore Insurance Brokers (Sussex) Ltd. (Portmore) is an insurance broker founded in 2012. It is located in Brighton, and offers different services in both commercial insurance and specialist sectors. The main services offered in commercial insurance include: construction, entertainment and leisure, manufacturing, marine, motor-trade and haulage, professions, property owners and public sector. Within the specialist sector, the company offers insurance for tender management, mid-term appointments, captive management, private client, yacht and renewable energy. (Portmore Insurance, 2013) The enterprise has fifteen employees who are involved in the insurance side of the business. As the insurance industry is a very competitive market, it is important for an insurance broker to provide a variety of different services as the company does, covering commercial insurance and specialist sectors. As mentioned on Portmores website Since our incorporation we have gained a reputation for being able to provide clear and concise programmes for a wide variety of industry sectors encompassing both standard and nonstandard insurance solutions. (Portmore Insurance, 2013) When Portmore made the decision of start up the company, the strategy adopted by the managers drove the decision to outsource their payroll to an external company called Sussex Payroll Services Ltd from the outset of the company's foundation. Sussex Payroll Services Limited (Sussex Payroll) provides a comprehensive yet flexible outsourced UK payroll service, tailoring it's services to each clients specific requirements. As a small UK payroll bureau, the company's aim is to become part of the business that they are supplying, by adapting to the individual needs of the client. (Sussex Payroll Services, 2013) Some of the internal contextual factors affecting the decision to outsource Portmore's payroll to Sussex Payroll were based on Portmore's strategy to focus on the growth of the business. Outsourcing payroll reduces the company's effort spent on non-core activities, increasing energy focused on revenue generation or other activities to generate growth. The objective of this study is to evaluate how a small company like Portmore manage this process. Another very simple reason to outsource payroll in small company such as Portmore is cost. The average salary to a payroll clerk in East Sussex (where Portmore is based) is 20,000 per annum. (Reed.co.uk, 2013) The cost to outsource the payroll of a small company to Sussex Payroll Services normally varies depending on the number of employees. As the buyer has less than twenty employees, it is possible to quote that the cost for outsourcing the payroll activity will cost less than 5,000 per annum. (PatriciaRr, 2012)

Looking at some of the external contextual factors of Portmores outsourcing activity, all information about employees payments must be submitted to Her Majesty's Revenue & Customs (HMRC). The HMRC website states that, you must set up payroll records for all employees you pay during the tax year. Your records must include all employees, no matter how much you pay them, even those earning below 109 per week (NICs Lower Earnings Limit 2013-14) or those paid just once a year. (HM Revenue and Customs, 2013) It is therefore extremely important for a company to remain up to date with all the polices and information required by HMRC in order to comply with the law. Non-compliance to these regulations can result fines and penalties that must be made at short notice if HMRC have reason to believe that money is owed to them. (Low Income Tax Reform Group, 2013) In order to comply with the rules set out by HMRC, it is important for a company to have a payroll clerk with up to date knowledge about the laws and policies laid down by the government to reduce the risk of being penalised. Outsourcing payroll to an external company that specialises in payroll (and therefore the HMRC regulations) reduces the risk of the information not be up to date and costs being incurred by non-compliance. (Bragg, 2007)

Analysis of the outsourcing issues


The outsourcing activity
The outsourcing scope varies from the "traditional bureau model" to the "fully managed service" and the "fully outsourced model". In a bureau model, the vendor is responsible for the payroll calculation, printing, payment transfers and statutory reporting; all data entry remains in-house. In a fully managed service, vendor is responsible for data validation, payroll calculation and transfer, handling employee queries and providing subject matter expertise. In a fully outsourced model, the vendor is responsible for all transactional and operational activities, including data inputting and systems maintenance. (Orion Partners, 2013) The services offered by Sussex Payroll are described below, showing a fully outsourced model: Using BACS (Bank Automated Clearing System) 1 to facilitate payment processes on clients behalf as an indirect submitter. (Sussex Payroll Services, 2013) Agent for all PAYE matters. Having permission from the clients to discuss any PAYE related matter direct with HMRC on the companys behalf. Completion of statutory forms, including: year-end returns to issue to employees and submit to HMRC. (Sussex Payroll Services, 2013) PAYE Agent for online services, creating access to vital payroll related data on clients behalf. (Sussex Payroll Services, 2013) Payroll Reports. Summaries and analysis of staff costs. (Sussex Payroll Services, 2013)

System was originally set up by the UK banking industry as a more secure and effective way to process multiple financial transaction payments. BACS is universally trusted as the most risk-free form of payment processing and operates alongside all the leading high street banks

Electronic Payslips. Customised payslips, creating an automatic way to control Payslips, giving the opportunity for customers employees to view their ePayslips on a mobile device. (Sussex Payroll Services, 2013) Administration of National Insurance(NI), Statutory Sick Pay, Statutory Maternity Pay, incentive schemes, bonuses, termination payments, pension schemes and ex-gratia payments. (Sussex Payroll Services, 2013)

Associated risks
When considering outsourcing Payroll activities, it is important to address the risks associate with this action. Most of the risks are related to the transition phase. Orion Partners described some potential risks in the transition process discussed below. (Orion Partners, 2013) To start with, a buyer's lack of knowledge in contract negotiation can create a poor contract for the service buyer. As described by Power et al, Outsourcing contracts can range in depth, detail, form and duration. However, good contracts are clear, concise, complete and have well-defined statements on how the client and vendor organisations will meet each others business outcomes and expectations. Therefore, not preparing for the contract specifications leads to a contract that does not reflect the business necessities. (Power, et al., 2006) Another risk is for the buyer to deliver incomplete data or technology to the vendor, creating poor access to the information and weak support. This action can affect the service delivery and cause difficulties for the vendor to handle complex cases, because there is a lack of documented information. (Orion Partners, 2013) Normally, the risks mentioned above are reflections of change of management or lack of skills to manage the transition phase on the buyer's side. The consequences are a delay accomplishing the transition phase or a stall in the project. (APICS and Protiviti Independent Risk Consulting , 2004) In relation to human resources and the transaction phase, it is important to consider the risk of losing key staff during this period. This scenario will affect the quality and delivery capability of the service. (APICS and Protiviti Independent Risk Consulting , 2004)

Critically evaluate the factors influencing the companys outsourcing decision


When a decision to outsource an activity is made, it is necessary to evaluate the key factors that drive the decision. Putting these factors together helps the corporation to assess the best route to continue this process. The main concern in any business is to reduce costs and increase profitability. When an activity is outsourced, the costs are known in advance, simplifying the company budget. Considering the company's core business is not payroll, outsourcing this activity saves time and money that would be spent on employing someone deal with this task. Therefore, the business can focus their energy on core activities. (Trace payroll, 2013) As all payroll activities have to be reported to HRMC, outsourcing the activity from the company means that they do not need to worry about changes in payroll legislation and statutory requirements. These are accounted for as part of the outsourced service. In outsourcing payroll, there are no costs of training, capital expenditure and IT support, as the suppliers are responsible for these services. Avoiding contract payroll expertise, there is no cost involved in covering staff on leave (unplanned or planned). As payroll activities offered by outsourcing suppliers are controlled by payroll experts, the standard core function provided by the vendors are: confidentiality, processing accuracy and meeting payment deadlines. This reduces the responsibility of the buyer to meet these objectives. As Portmore's core business is not payroll, the decision to outsource this activity makes sense as the company can focus on increasing profitability and market shares. This decision reduces costs as the average salary to a payroll clerk in East Sussex (where Portmore Insurance is based) is 20,000 per annum, whereas the cost of outsourcing the activity would be around a quarter of this. (Reed.co.uk, 2013)

Demonstrate how the company manage the outsourcing activity


Portmore utilises some principles to manage the outsourcing activities. One of these principles is through service levels agreements. However, it is also important to understand some steps in how Portmore managed the whole service, implementing the interaction between the buyer and vendor. Some steps will be mentioned in this study even though they do not belong to Portmore's processes. To manage the outsourcing payroll service, the first priority is to map the process. This process mapping consists of Human Resource (HR) transactions. This means identifying the activities each employee is involved in within the company. The company must then focus on the integration requirements with other systems such as HR and Finance. Once the requirements are identified, it is necessary to decide how to make this integration work, verifying the data necessary to interact on both sides, the vendor and the buyer sides. Considering the system integration when the systems are updated, both systems (the old and the new system) shall run in parallel until they are fully synchronised, making sure that the data are matching and correct. (Paterson, 2013) 6

As Portmore started the company activities utilising a Sussex Payroll Services to deal with the company's payroll, there was no necessity to integrate the systems. However, it is important to mention this as one of the necessary steps. To achieve this synchronism, Karen Paterson described that is achievable in three parallel runs. [Synchronisation] is usually achieved in three parallel runs. If there is integration with other systems, then a test environment should be created and full payroll runs undertaken from end to end; so every part of the process is checked. The data used for this ideally should be obfuscated live data, so the coverage is sufficient to test every data type in an interface. (Paterson, 2013) Next, Portmore created a pay calendar, setting out cut-offs for data processing dates, money transmission dates and pay dates. This was communicated to everyone involved with the payroll. A person in the management team became responsible to interact with Sussex Payroll to control these transactions. This same person controls the service levels agreements, certifying that the service has been delivered as it was specified in the contract. There are meetings with the supplier to measure performance every three months. An example of service level agreements is attached on Appendix A and it is considered very similar to the one utilised by Portmore.

Evaluate the strategic and operational implications of the companys outsourcing decision

Define Requirements

Market Analysis

Engage suppliers and RFP

Supplier Selection

Contracting

Transition planning

Figure 1 - Key steps to outsourcing a payroll activity

To achieve a successful outsourcing performance, an assessment of how to select a vendor has to be done to cover all the topics in this development. This process starts with a definition of the buyer's requirements, followed by market analysis, engagement of suppliers and requests for proposal (RFP), supplier selection, contracting and transition planning. (Orion Partners, 2013) When the requirements are defined, it helps to create a tender pack, and agree what is the desired scope of the payroll outsourcing deal. The company should define what they want to get out of outsourcing, for example: location, conditions of contract and service specifications. Looking at market analysis, it is important for the organisation to understand which vendor can meet the objectives and requirements pre-defined. They must research what the suppliers can achieve as service providers, the price and minimum operation size before considering engagement with the process. Other points that should be focused on this step is if the supplier organisation's culture fits with that of the buyer; the staff capabilities of the vendor meet expectations; the quality of the service offered; and the technical capabilities offered by the vendor. The next phase, after deciding on the best supplier to deliver the service, is to engage with suppliers and RFP. Engaging with suppliers is seen as an important step in problem solving and solution providing. As Derek Bishop described, It may sound simple but taking the time to share the vision with your supplier can give them the stepping stone to provide you with exceptional service. (Bishop, 2013) RFP is an important process where the service needs or preliminary requirements are formally proposed in the form of documentation to solicit the suppliers, including a request for the price and other relevant company information that impact on the service. This process can save time and effort for both parties. However, due diligence will confirm if the supplier can achieve the performance levels and if they are realistic.

The supplier selection is based on the results of the RFP. Normally, the decision of which supplier to choose is influenced by the way the companies culturally fit. There will also be some other influencing factors as location, experience and cost, which will aid the buyer's filtering process. When the supplier is finally known, the next step is to organise the company internally to focus on the preparation of the contract. This process will help the buyer to manage the service level agreements provided by the supplier; to know if a penalty is applicable in the process; and how to terminate or end the contract if necessary. The description of the exact service offered by the supplier is provided to the buyer, so that they will know what remains the buyer's responsibility. The service level agreement will be covered in how to manage the activity. (Mohamed, 2009) When the contract is signed, the transition planning is put in place. As described by Deloitte, Both the client and the vendor can more quickly realise the full potential of an outsourcing agreement when it is underpinned by a solid planning foundation and each party is mindful of transition risk. Both parties are more likely to feel comfortable in the relationship, build positive momentum, enjoy improved performance and stability, and agree that sufficient value is being delivered at a fair price. (Deloitte, 2013)

Recommendations and implementation plan


As Portmore Insurance manage the vendor service using service level agreements and a manager to interact with Sussex Payroll, it is possible to say that there is still room for improvement. It is recommended to increase the number of managers involved in this process, to reduce the risk of interruption to service in the event of losing the key members of staff. This would also provide cover for planned or unplanned leave. This has not been considered by Portmore to this date. Reacting to this risk means that Portmore can avoid a potential discontinuation in contact with the vendor. Another recommendation in to how manage this process is to keep track of the service and periodically compare services with others suppliers, trying to improve conditions of the contract when renewal is due. Focusing on due diligence within the service provided by the vendor creates a substantial amount of data that will be useful for decision making. The final recommendation is to keep another supplier pre-defined in case of some eventuality that could happen to the vendor, for example bancruptcy, which would lead to a sudden cessation in the supplier services.

Conclusion
This report analysed the management approach adopted by Portmore to control the outsourcing activity executed by Sussex Payroll Services. The focus of the report was to identify how the company manages the outsourcing activity through techniques developed by the market, identifying some areas where the management can be improved. The report analysed the buyer's decision to outsource, considered outsourcing activity and the associated risks, looked at the strategy and operational implications on how to select the vendor, and how the contract is managed using the service levels agreements. To summarise, it is important for Portmore to re-consider some of its management processes of this payroll activity. Portmore must improve the way this service is managed to avoid the possibility of the service being interrupted. Some recommendations proposed to improve the management were to increase the number of people involved on the buyer's side, and to compare the service provided by the vendor with others providers reduce risks and negotiate better terms of contract.

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References
APICS and Protiviti Independent Risk Consulting , 2004. Managing the risks of outsourcing, Chicago: s.n. Bishop, D., 2013. Engaging with suppliers. [Online] Available at: http://www.cultureconsultancy.com/engaging-with-suppliers/ [Accessed 22 November 2013]. Bragg, S. M., 2007. Accounting Policies and Procedures Manual: A Blueprint for Running and Efficient Department. New Jersey: John Wiley & Sons . Deloitte, 2013. Outsourcing: How to Plan for a Smooth Transition. [Online] Available at: http://deloitte.wsj.com/cio/2013/03/27/outsourcing-success-may-hinge-on-smoothtransition/ [Accessed 22 November 2013]. HM Revenue and Customs, 2013. Starting the tax year. [Online] Available at: http://www.hmrc.gov.uk/payerti/payroll/year-start.htm [Accessed 15 November 2013]. Low Income Tax Reform Group, 2013. How to survive an enquiry by HMRC. [Online] Available at: http://www.litrg.org.uk/low-income-workers/self-employed/enq-penalties-debt/howto-survive [Accessed 24 November 2013]. Mohamed, A., 2009. Outsourcing contracts: Getting started - Essential Guide. [Online] Available at: http://www.computerweekly.com/feature/Outsourcing-contracts-Getting-startedEssential-Guide [Accessed 20 November 2013]. Orion Partners, 2013. The Essential Guide to Payroll Outsourcing, London: s.n. Paterson, K., 2013. How to manage outsourcing your payroll. [Online] Available at: http://outsourcemagazine.co.uk/how-to-manage-outsourcing-your-payroll/ [Accessed 20 November 2013]. PatriciaRr, 2012. Fees for Payroll & RTI. [Online] Available at: http://www.accountingweb.co.uk/anyanswers/question/fees-payroll-rti [Accessed 28 November 2013]. Portmore Insurance, 2013. Portmore Insurance. [Online] Available at: http://www.portmoreinsurance.co.uk/portmore-insurance/ [Accessed 10 November 2013]. Power, M. J., Bonifazi, C. & Desouza, K. C., 2006. Negotiation and contract management. In: The outsourcing handbook: how to implement a successful outsourcing process. London, Philadelphia: Kogan Page, p. 123.

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Reed.co.uk, 2013. Reed. [Online] Available at: http://www.reed.co.uk/jobs/accountancy/payroll/east-sussex [Accessed 20 November 2013]. Sussex Payroll Services, 2013. Payroll Services. [Online] Available at: http://www.sussexpayrollservices.co.uk/payroll-services/ [Accessed 15 November 2013]. Talloo, T. J., 2008. Business Organisation and Management (For B.Com Couese Of Delhi University). Delhi: Tata McGraw-Hill. Trace payroll, 2013. Benefits of Outsourcing. [Online] Available at: http://www.tracepayroll.com/about-you/benefits-of-outsourcing/ [Accessed 15 November 2013]. Williamson, O. E., 1975. Markets and hierarchies: analysis and antitrust implications: a study in the economics of internal organization. s.l.:Collier Macmillan.

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Apendix A

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