HR Budgeting: How to Plan, Justify, and Align HR Costs with Business Strategy

HR Budget

The HR budget includes:

Ongoing operational costs related to HR's essential services, such as recruitment and selection, employee relations activities, and talent management.

Overhead costs that do not directly contribute to HR function and service provision, such as utilities, maintenance, and other costs related to occupancy.

One-time project costs planned to support HR strategy and objectives (for example, an executive salary review).

The operational side of the HR budget includes resources that are directly related to staffing and expenses required to provide HR services to internal customers. This budget ordinarily includes resources related to:

·          Talent acquisition.

·          Training and development.

·          Compensation and benefits.

·          Employee and labor relations.

·          Health, safety, and security.

·          Information technology.

·          Planning.

·          Philanthropy.

Many of these expenses are variable and will be affected by the organization's and HR's strategies. For example, growth and retraction strategies will affect employee head count and may involve additional expenses for recruiting or outplacement services. A strategy that requires a change in organizational structure or culture will probably require funding for consultants and development activities.

Therefore, the first thing HR leaders must do in the process of allocating resources to strategic activities is to compare previous/current activities and budget allocations with what will be needed to support the proposed organizational strategy. Having several years of HR data to establish rules of thumb and trends in expenses will be helpful in defining a new budget.

Creating a Business Case to Secure Resources

Some strategic activities may be budgeted and managed as projects outside HR's operational budget. These projects must compete for available organizational resources, since proposals will be funded according to strategic priority. Success depends on establishing a clear and strong alignment between the specific project and the organization's strategic goals. This relationship is set forth in a business case.

A business case is a presentation to management that establishes that a specific problem exists and argues that the proposed solution is the best way to solve the problem in terms of time, cost efficiency, and probability of success. The form and level of formality of the business case will vary by organization. Some are written proposals with supporting financial analyses, while others may be slide-supported oral presentations.

Whether they are written or oral, business cases generally have the same components. These components are described below and illustrated with a description of a possible HR business case.

·          Executive summary. This summarizes and establishes the purpose of the project. It supplies the condition or change impelling the function's action.

Example: HR is aware that the organization's strategy includes growing its South American businesses. Until now, these businesses have operated independently from headquarters and from each other. The lack of common policies and processes for compensation and rewards and talent management and the lack of a shared organizational culture would inhibit the strategy.

·          Recommended solution. The objectives for an ideal solution are defined (the desirable outcomes of such an initiative), and the proposed action is described in sufficient detail to show how it meets these objectives. In some cases, alternatives may be described as well, and the reasons why they are not being. recommended may be discussed.

Example: HR proposes conducting a customized salary and benefits survey for the targeted growth areas and the current countries in the portfolio and building a policy and practice "culture" for the existing individually run countries that would make acquiring a partner or growing organically more feasible.

·          Risks and opportunities. Risks should include outcomes that could decrease the project's chance for success, outcomes that could present new opportunities that would require action, and the risks of doing nothing at all.

Example: HR foresees the difficulty of obtaining this information in some businesses with poor data records but has included extra time and resources in its reserves for this. There is a currently unresolved legal issue about obtaining access to data in one country. The opportunity is that this information can come at an opportune time for the company's acquisition strategy and make integration much smoother.

·          Estimated costs and time frame. The project budget should include all foreseeable elements (labor, equipment, fees, travel, and so on) plus a reserve for the unforeseeable based on the project's risk. The time frame should keep in mind not only the project requirements but also the organization's needs. Longer or more complex projects may be structured in phases, with gates or review milestones at which management can decide whether to proceed or not. Example: HR provides a cost estimate but also estimates this amount in terms of the benefits this information could provide in the event of an acquisition or merger

Once approved and implemented, projects should be revisited periodically to make sure that the business case is still sound, that no risks have emerged to change the cost-benefit or risk profile, that no changes in the external environment have eliminated the need for the action or changed the characteristics of an effective solution.