Leaving payroll behind

Rothmans uncouples payroll from the rest of the organization with a fully outsourced option

Rothmans, Benson and Hedges Inc. has always had a top-notch payroll department, according to Mike Frater, the company’s director of finance. Top-notch, but small and vulnerable and a lot of effort had to be put into supporting the function.

“We have a relatively small employee base, somewhere north of 750 active employees,” said Frater.

Handling pay for the Toronto-based tobacco firm was a payroll department of two people, which recently shrunk to one after one of the employees left. Factor in things like sick time and vacation time, and there wasn’t much wiggle room. That got the company thinking about risk management, said Frater.

“I just want to make sure that my payrolls get processed accurately on time and every time,” he said. “I wanted to make sure I wasn’t in a situation where we were relying on one person 100 per cent of the time.”

In the past, Frater wouldn’t have had a lot of options. He could outsource some of the functions to a third party — such as printing the cheques and handling direct deposits — but he still needed a warm body in the payroll department to handle things like address changes, setting up new employees and updating and maintaining the payroll system.

But now a new outsourcing concept, known as business process outsourcing, allows companies to outsource entire business functions and payroll is seen by many as ripe for plucking.

The more Frater examined at the payroll department and the idea he could move the entire function outside, the more it made sense for Rothmans to do so. When he looked at the big picture he simply couldn’t justify the risk of keeping the payroll department in-house, and went in search of a fully outsourced solution.

The company settled on Ceridian to take over the payroll function in a deal announced last month. Interestingly, Frater said he doesn’t expect the move to save the company much, if any, money. From his view, it’s all about risk management and taking the possibility of a problem with payroll off the table.

“There might be potential cost savings,” said Frater. “But it’s too preliminary at this point. We didn’t want to spend more money, and we would love to save money.”

Dave MacKay, vice-president of business development at Ceridian, said the type of outsourcing Rothmans chose is really taking off.

“(Business process outsourcing) is actually the fastest growing part of our business right now and the main reason is that it’s a very competitive environment,” said MacKay. “(Companies) concentrate on really achieving excellence in their core business and if payroll or an HR process is not part of that core business, then they want somebody else to do it.”

By outsourcing the payroll department, firms like Rothmans and Molson — which signed a major deal with Ceridian earlier this year — don’t have to deal with the administrative issues anymore.

“They don’t have to worry if somebody in the payroll department leaves to again acquire, retain and train people who are knowledgeable in that area,” said MacKay.

And by getting rid of functions that aren’t core to the business, firms get the added bonus of dealing with a vendor that is investing significantly in payroll and HR and dealing with it on an ongoing basis.

“All our investment dollars are focused in on HR,” said MacKay. “If there’s a hurricane that blows through Toronto, we’re up and operational in real time four hours later. Most companies will not invest that type of money into their HR processes.”

From start to finish the Rothmans deal will take about four months to implement, he said. There are a variety of factors that can speed up or slow down the processes. For example, the deal with Molson had a very fast implementation time because Ceridian actually acquired the system and staff Molson used to run its payroll.

“There’s no sort of system work (in that case),” said MacKay. “We’re taking the people and the systems, so we’re adopting everything and we can turn that on in one day.”

The Rothmans switch is also relatively quick because, from a payroll and HR perspective, it’s not that complicated.

“Where it gets long is when you get into a whole bunch of complex multi-union environments with multiple jurisdictions,” he said. “If we need to do things between Canada, the U.S. and the U.K. that starts to elongate the implementation cycle.”

Alan McEwen, a payroll consultant based in St. Catharines, Ont., said the notion of totally getting rid of the payroll department — like Rothmans and Molson have — has gained ground in the last couple of years.

The high cost of implementing and upgrading payroll and HR systems is one of the main drivers of the business process outsourcing move, he said.

“Many organizations are looking at several million dollars to upgrade to a PeopleSoft or an SAP and that’s a big outlay,” said McEwen. “It’s hard to justify sometimes.”

Paying an ongoing fee versus a big capital expenditure might be easier for some organizations to swallow.

But organizations shouldn’t just simply jump on the outsourcing bandwagon because it’s a hot trend in the marketplace, he said.

“The emphasis should not be on the outsourcing,” said McEwen. “That’s just another model for delivering the services. The emphasis should be on what the client is getting and the features and functionality.”

If an organization isn’t prepared to look at its processes critically, change them and implement better practices, then outsourcing really isn’t a good model, he said.

“At the end of the day if you’re just taking the functions and moving them outside, no one really benefits from that,” he said. “The only way that moving it outside externally really benefits people is if the external vendor can actually improve efficiencies by cutting the fat. So unless the client is really willing to look at process efficiencies in the payroll-related functions, then it’s not a good fit because it’s going to cause tension and it’s not going to be successful.”

But as long as organizations are under cost pressures — a scenario not likely to ever disappear — the payroll department will continue to be ripe for outsourcing unless it can show it’s really adding value to the organization.

“Unless the payroll department can itself change to show the employer they’re really adding value, there is going to be tremendous pressure to fully outsource the payroll function to an organization that has lower costs,” said McEwen. “It’s a pretty straightforward business decision. So the whole payroll profession is struggling hard, just like the HR profession, with how it can re-engineer itself so it’s adding value to the organization and not just being a cost centre.”

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