Does Your HR Budget Drive Business Strategy?
Are you spending your Human Resources budget on HR capabilities that drive strategy?
All executives are accountable for budgets. How sure are you that your HR budget aligns scarce resources to drive the HR capabilities required to execute strategy? Do your internal clients complain that they are not getting the best value for their Human Resource investment? Most businesses question every dollar spent and are entitled to hold HR accountable for delivering the highest value.
- Is there work being done in HR that does not clearly provide direct business value?
- Are there investment in HR capabilities that are not being recognized?
- Is there a lack of clarity around exactly where HR is spending its money and how it aligns with the overall business strategy?
- Do you feel constant pressure to reduce the cost of HR? And is that causing erosion of strategic HR capabilities?
Support organizations (ex, HR, Finance, and Legal), are constantly under the spending microscope. Funds are scarce, and leadership is accountable for ensuring that the highest value is extracted for every dollar. Unfortunately, most support functions are structured around silos often not designed to clearly communicate to the business, let alone department managers, the real value provided for their activities. This can lead to arbitrary decisions around budget cuts or, worse, eliminating activities that really are critical to the business. A classic case is the annual struggle to fund Learning & Development. This is all too often one of the first places to cut, yet this function is critical to ensure that the employees are developed and that businesses are equipped for growth.
Viewing the HR Budget as Capabilities that Contribute to Strategy
A more effective way to look at the HR budget is to shift from viewing it as a group of associated costs to a set of capabilities that provide strategic value. In traditional siloed HR budgets, teams are devoted to delivering capabilities such as General HR, Learning & Development, Talent Acquisition, Compensation, and Benefits. However, the reality is that the activities done by these teams overlap ‘organizational boundaries’. How often are Employee Relations / Labor Relations called upon to do General HR functions? This also happens when the HR Generalist is asked to assist with talent acquisition, or the Learning & Development team is asked to provide Change/OD support or to plan a recognition event. The lines are rarely 100% clear. This muddies the waters around how much time and resources are actually spent on each capability.
The HR Capability Model
A typical HR Capability Model consists of the following ‘Families of Capabilities’. Granted, there are many variations depending on your organization’s design, but we have found the vast majority of HR falls along the following capability families:
By allocating the actual cost of each capability (including compensation / fringe, external services, and internal expenses), we can gain a more accurate and reflective cost of the major HR capabilities.
With this in mind, the challenge becomes reallocating funds and resources to more effectively support the business strategy. Above, we see an excessive weighting towards Benefits / Compensation and HR operations, while the General HR role and Org Development / Talent Management are significantly underfunded. For this particular business, Benefits and HR operations are transaction-based capabilities that HR should optimize at the lowest possible cost. Whereas, strategic HR capabilities like Organizational Development and Talent Management are critical to driving a successful business and should receive greater focus.
How is your Human Resources spending its valuable budget dollars?
Do you want to talk more about how Human Resources can invest in their own capabilities? Our Capability Based Budget process is fast, collaborative, and creates an aligned view of the function within your team and with your key sponsor …the business.