HR Budgeting: Not Just Numbers but a Strategic Blueprint

Budgeting as I understood it for the first one and a half decade of Public Sector experience, lay purely in the domain of Finance and meant an incremental build up on historical data periodically monitored for variances. This understanding was turned on its head by the CEO of the Apparel Retail Company and my Reporting Manager, when he asked me to prepare an Annual HR Budget for the Corporate, the Factory and the Retail Network. Overwhelmed by the task accompanied by my innate fear of numbers I turned to the CFO and the Retail Head for “Gyaan” to equip myself for “ a Road Never Travelled”.                                                                                   

Process: For a First Timer like me the Budgeting Process was a Five Step Exercise and remains so :                                                                                                                       

1. Collating  past data (of at least two years) and verifying its accuracy. This is followed by an analysis of the underlying narratives so also the variances                             
2. Understanding the Business Objectives , Strategy and Plan for the next Financial Year                                                      
3. Collaboration and Consultation with the Business Heads for Future Forecasts                                                          
4.  Preparing the HR Budget , running it past the Business Heads and the CFO, handling a  battery of questions, sharing  alternative perspectives before validation  
5. Presenting the Budget as a “ Critical Input” to Business  at the Annual Meet getting a Sign Off                                                           

Challenges :  This process itself was fraught with multiple challenges key amongst them being :  

1. Accessing past data from multiple sources , reconciling asymmetrical data and structuring it                                              
2.  Understanding the difference between the past  business context in which earlier budgets were prepared and the “ new “ strategic context                                                                                                                                       
3.  Iterative discussions with Business Heads for Future Forecasts throwing up varying numbers                              
4.   Managing a  team exasperated from the tedium of the process                                                                                                                                                                            

It was through this exercise that the seeds of a Business Aligned HR Professional in me were sown. Over the years as technology interfaced with accessibility and integration of data , my ability to create a reliable,  accurate and high integrity budget matured, as I added external market factors to employee data points :                                                                     

1.  Industry Trends/Benchmarks : Compensation & Benefits , Performance  Increases, Inflation, HR Policies, Skill Shortages                                                                                   
2.  Market Knowledge of HR Products / Technology : Vendors , Suppliers & Service Providers                                  
3.    iMarket Scanning : New Competitors who may impact the demand & supply of skills & retention                       
4.   Regulatory Changes : Minimum Wages, Third Party Contracts ,  Retirals and Personal Taxation ..AND                                                                                                               
5. Employee data points included: Exit / Stay Interviews, Engagement Surveys, Glass Door Posts..

Inclusions:  With all this in place “What “should the HR Budget essentially comprise of ? Though the items in here are indicative not exhaustive list as these may vary from industry to industry, they has been put together from several years of budgeting experience:

1. Workforce  - Existing and Additional : Number & Incremental Cost                                                                       
2. Talent Development : New Skills / Reskilling / Upskilling Costs
3. HR Automation :  New / Upgradation
4. Discretionary Benefits ( New / Upgrades) : Numbers & Costs
5. Regulatory Changes : Cost/ Head & Numbers / Administrative Costs
6. Talent Acquisition : Portals , Campuses, Search Partners Costs
7. ESG & DEI Mandates : New / Incremental Costs                                                                                                            
8. Retention & Employee Engagement  : New / Incremental Costs                                                                                                 
9. Weeding & Seeding: Low impact high cost / high impact , low cost initiatives                                                                                                  
10. Contingency Amount : To meet unprecedented  situations                                                                                
11. Business Expenses incurred by HR: Communication, Travel , Vendor / Supplier Contracts                                                                                                                             
12. Legal Expenses and anticipated cost of legal judgements                                                                                                                                                                                                                                                                              

The Three Way Test: In my experience the true test of the budget lies in it being fully representative of all investments & expenses, with a zero or acceptable level of variances and a plug on any leakages or inefficiencies in allocation and spend.                                                                               

As the process & outcome ownership for a high integrity budget shifts to Team HR, the alignment of HR as the strategic business partner begins to grow into a closely coupled link. During periodic monitoring meetings variances become few and tend to remain within tolerance guidelines.                                    

The importance of bringing this experience to you is that from the spring of year 2000, the first three months of the new calendar year are primarily devoted to the HR budgeting process.                                                                                                                                                                                                                                                             

Approach to Budgeting: What should be the ideal approach:

Incremental or Zero Base? Experience coupled with research suggests that Incremental budgeting which relies on the budget of the previous year with minor adjustments to the baseline is typically used in stable small sized organizations with predictable HR needs. While the process may be less on tedium and time , its ability to reduce inefficiencies in allocation and spend ,is limited.                                                                                       

Zero Base Budgeting (ZBB) is an approach which requires the HR Team to critically evaluate all spends and reallocate based on the business priorities of the year. ZBB works best for Organizations undergoing restructuring or a turnaround phase. It works equally well in Start Ups and Accelerated Growth especially for Organizations operating in an uncertain and dynamic environments.  The upside to this approach is the laser focus on optimizing allocations and spend, the downside being its short term focus and frequent changes in HR initiatives suggesting inconsistency and  disrupting some existing practices.

Planning for the Unexpected :  While the key words used in this sub title are oxymorons , I must confess that the experience I have shared is from times of relative stability and the collective wisdom of the leadership teams I have been part of have steered the course of business successfully.                                                                                                                                                                          

The Pandemic and its aftermath demonstrated the vulnerability of the Business Plan and Budgets prepared in the early days of 2020. Healthcare costs, covid coverage extending to paid leave & contingency advance, mobilization cost of life saving equipment in medical emergencies ,  remote working arrangements, digital infrastructure and training costs,  work force shrinkages, temporary salary roll backs, creeped into sacrosanct budgets and there was no going away from them.

What Covid 19 taught HR? Sharing some thoughts based on Research:                                                                                                                                                                        

• HR plays a pivotal role in managing a “Crisis”, its strategic intent as critical as the last mile delivery                         
• Agility over Rigidity: Organizations with pre-existing remote work options adapted faster. Hybrid & Flexi time are NOT taboo, results matter                                                                                                                                 
• Crisis Playbooks in normal times create a mental prepared ness if scenarios undergo radical shifts                           
• Technology  proved to be a lifeline as use of digital HR Tools sustained operations with minimal disruptions                                                                                                                                                                                    

  “ Doing More with Less” emphasizing the need for continuous upskilling & reskilling  premediated by trends  like the “ great resignation”   “ freeze on new hiring” and redeployment needs                                                                                                                                                                              

Mental Health became a “ non - negotiable “ priority with “well being programmes” staying centre stage

Are these learnings sustainable? “What if” another “Black Swan” event occurs disrupting business? What steps can HR take to think ahead and move from being reactive to proactive?  Here is what our research tells us:                                                                                                                                                                    

• Sector Specific Collaboration: Learn from Peers in the Sector from their experience and expertise                            
• Crisis Management Protocols:  Develop a framework & action plan and harness an execution force                                     
• Build Workforce Resilience:  Cross Train Employees to take up multi tasks during emergencies                                                                                                  
• Strengthen Digital & Data Capabilities :  Leverage both to detect early warning signs and preempt                         

Hoping this article is of help in your HR Budgeting process!

By Triveni Mehta: Senior Human Resource Consultant                                                                                                       

Research Inputs: Sunny Sharma: Senior HR Executive - MHROD Class of 2023