Budgeting

Soon, all across many companies in many countries, HR Directors will be completing the dreaded annual budget process. On such critical occasions, the experienced HR Director, as they look across the boardroom table, meeting the CEO and the CFO, typically will be mentally prepared for the sacrificial budget cuts that are customary.

Fundamentally, the HR budget is a great opportunity to reposition and reinforce the HR function as a strategic partner, by embracing the budget process to gain strong credibility from the executive team. A few months ago, I was coaching a HR Manager struggling to move into more strategic HR. When it emerged that she had no HR budget, one of the first action steps was developing a proper HR budget.

Early in my career, I was fortunate by being appointed as head of support services for a division, which included managing two accountants, HR staff and other support functions. Though I didn't fully realise it at the time, I gained a strong understanding of the value of good annual budgeting. These lessons were reinforced through rigorous monthly variance analysis (anything over $1,000 or 10%) and reporting process, where I had to meet with all the department managers and present the division's financials to the leadership team. Not only did I learn a lot about the business, but it also gave me great budgeting skills for more senior HR roles that followed.

HR Initiatives are projects

In one of his books in the early nineties, Tom Peters strongly recommended for organisations to adopt a project approach. He suggested that it was a much better way for companies to get things done, by changing into a results-based mind-set. In fact, he went as far as defining project management as a premier skill for future managers.

It is critical for HR to define as many processes as specific projects, be it the 360-feedback review; the annual pay review; the development of a new leadership program; or a new coaching program. As a practising consultant, it is very helpful to understand the broad budget for a project, as it is difficult to design and develop a Rolls Royce HR project with a Toyota budget.

Clearly, by using business strategy to identify the people drivers and HR initiatives that will support delivery of the strategy, is the best starting point for developing your HR budget.

Develop a partnership with the CFO

Many line managers rely on an accountant to provide them with financial support, including budgeting and monthly reporting. HR should also have an accountant that supports the HR function. In addition, the HR Director should develop a close partnership with the CFO, to ensure there is a close working relationship. In most companies, other than capital-intensive industries, employee costs make up the majority of fixed costs. I always invited the CFO to join me when I reviewed annual pay increases with the CEO, and in reciprocal fashion I was invited to attend budget presentations, which gave me a great overview of the business, but more importantly, an opportunity to ensure that all HR initiatives are clearly aligned with business strategies.

Encourage team ownership

I am a strong believer and supporter that every HR team member should own some line items in the HR budget. For the HR Administrator, it could be stationary budget, or coordinating travel and accommodation. Specific budget sign-off authority helps the team to review the budget on a monthly basis, by reporting on variances, as well-being involved in budgeting and approving all expenditure for their specific costing codes. It also develops their financial and business skills.

Encourage clarity on people costs

It is tempting to exclude some people related expenses and leave it up to individual line managers to include in their departmental budgets. Some companies have very different approaches. I won't try to get into the benefits or disadvantages of different ways of including or excluding costs, as often it is viewed more as a control issue, rather than a clear understanding of achieving better visibility and coordination. Still, I think it is inconsistent for a company to adopt a strong employer branding philosophy, only then to leave it up to individual managers to decide how much they would budget for recruitment advertising, at the risk of using inappropriate advertising for certain roles. My personal view is that all recruitment costs should reside with the HR function, as it is primary function of HR to ensure the organisation attracts the right people into the business. Get that right and many of the other people issues become secondary.

Be courageous and absorb the real people costs

Again, the CFO and the CEO would benefit from visibility of understand the total investment for staff development in a coordinated learning budget, for example. Some years ago I witnessed a number of managers simply excluding various approved corporate programs, due to repeated budget cuts. The inconsistency that resulted was a major concern for the national service provider, as well as those managers that wanted to retain the program but succumbed to their budget review cuts. A much better solution was for these company wide costs to be absorbed by the HR Department, despite concerns about ownership and control.

Provide value to the business

One of the companies I worked for, a contracting business, had an internal invoicing system, which meant all HR costs had to be recharged to a business unit. Every interview I did, every assessment I conducted, every reference check I completed, was charged to the hiring manager's budget, subject to proper sign-off and acceptance. This was a great way to learn how to provide real value to internal customers. As a consultant, you will quickly discover that real customers only pay when they believe they have received real value. HR should often reflect on whether the business would really be willing to pay good money for some of their services. If not, those are the first services that should be reviewed during a budget exercise.

After saving a company $3 million a year in WorkCover premiums, through a best practice injury management program, I negotiated some people investments with the CEO in other areas. The credibility of the HR function is significantly improved when you can demonstrate real savings and value.

Embrace the budget process

If you are ready to review your budget process, to build closer relationships with the CFO, to define as many HR initiatives and services as projects - if you are keen to adopt a more effective commercial budget process and to deliver real value to the business - then you are ready to take a seat at the executive table as a respected contributor.