As a key department of the corporation, human resources (HR) is a major player in the corporate budget. Aside from its role in budgeting for critical internal requirements, such as benefits administration, it plays an important role in delivering revenue-related services, including workforce planning, talent management and succession planning across the entire organization.
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Despite HR's central role in the business, many companies could do a better job of addressing their unique HR requirements when it comes time to prepare the annual budget.
To understand HR budgeting, it is necessary to start with HR's day-to-day functions and how they are typically automated.
For the purpose of budget preparation, think of the daily functions typically performed by an HR department as involving either administering the organization's workforce or changing it in some way.
Workforce administration includes such functions as maintenance of the personnel database and employee records, personnel administration, compensation management, benefits administration and payroll.
Other HR functions, in contrast, have a significant effect on the size and nature of the workforce itself, and include recruitment, hiring, onboarding, training, succession planning and retention.
In most cases, companies will have automated some of these functions by using ERP software, human capital management (HCM) suites or specialty software for key aspects of HR, such as talent management and compensation management.
HR functions: Planning for the future
To a large extent, HR provides its services to multiple operating groups around the company, whether they are geographic or focused on a specific line of business. As such, the major budgeting task revolves around workforce planning: what the expected size and composition of the workforce is in each department.
Consider the workforce planning requirements of an operating division. Perhaps starting with a database of its current workforce, the company can follow a logical process like the one below to plan out its workforce needs:
1. Management estimates the number of net additional hires that need to be made in the next fiscal year.
2. It estimates the number of employees who will resign or be terminated.
3. The resulting net new hires become a recruitment planning project.
4. If certain operating assignments are more critical, they get priority in the hiring process.
5. A talent management plan is created to address the reality that some employees will switch jobs in the next calendar year.
Software for HR budgeting
The software that companies use to automate budgeting for HR's workforce planning and administration functions falls into three main categories.
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Core HR software provides the foundation for such functions as workforce administration and retention. The software can come from ERP vendors or specialized HCM software vendors.
Budgeting, planning, forecasting and strategy software generally comes from vendors specializing in corporate performance management (CPM). With a few exceptions, these vendors provide a generalized approach to planning, without regard to specific HR functions.
Finally, business intelligence and reporting software vendors such as QlikTech International and Tableau Software can add analytical value to the other two main types of HR software. What-if analysis and the ability to develop complex reports are useful to any planning function, including workforce planning.
Prescription for HR budgeting success
Here are some steps companies can take to do a better job of budgeting for their HR needs:
Start with the core. Document HR's approach to all major functions -- workforce administration, succession planning and so on. Automate with the aforementioned ERP, HCM suites or specialized HCM software. Buy or build are possible routes.
Document the value proposition. Suppose you work for a computer hardware vendor that markets hardware, spare parts and maintenance across four geographic regions. This could involve 12 profit and loss (P&L) centers if every region has all three functions. HR must develop relationships with these P&L centers and document how it adds value for them. (It's even better if the P&L centers document how they add value.)
Integrate HR into corporate planning. HR has an important seat at the planning table, and its approach should be well defined by the company. HR must also be integrated into the planning cycle of each operating group, and it must clearly define its own needs for expansion.
Consider automated systems for workforce planning. These systems often require the HR department to build a database of the workforce, then perform what-if scenarios. Certain CPM vendors (e.g., Centage, Tagetik) offer such applications. They are also sold by vendors that specialize in HR.
Automate the remaining HR budgeting functions. A few automated solutions for HR budgeting go beyond just the workforce planning function. Software vendors such as Board International let you develop in-house business intelligence and CPM applications for linking HR performance management and budgeting to companywide processes. The vendors have case studies that can be used as a starting point for developing planning solutions for your HR department.
About the author:
Barry Wilderman has more than 30 years of experience as an industry analyst, researcher and consultant at such companies as Meta Group, Lawson Software, SalesOps Analytics, and McKinsey and Co. He is currently president of Wilderman Associates. Contact him at Barry@WildermanAssociates.com and on Twitter at @BarryWilderman.