How to Budget for HR in 2021

By Linda Brenner | December 02, 2020

It's hard to look like an investment when you act like a cost.

Budget season 2021 is front and center and a lot of HR leaders have already hunkered down to deal with this same old reality. After a challenging 2020, businesses are optimistic about the future, but caution and practicality in budgeting is inevitable as they begin to recover and adapt to changed environments. Historically, HR spending requests have invariably ended up looking like sunk costs rather than sound business investments – it’s time to change that up.

This year, start by putting yourself in the place of an investor. What would you need to know about this business in order to make a sound investment?

First, you would need to understand the business model and the assumptions that make it work. When it comes to people, the key business question is “what intellectual capital are we depending on to drive cash flow and what talent do we need in order to create and sustain it?” Intellectual capital makes up the majority of value growth in most businesses today.

Often you can name the key intellectual capital that drives a given industry: brands and trademarks driving consumer products, research and patents driving pharmaceuticals, engineering and technologies driving high tech. Also, within industries, varying strategies drive another level of intellectual capital – leading in innovation drives one strategy, while mastering partnerships and collaboration might drive another.

At the heart of intellectual capital at both these levels is the particular talent required to generate it. The roles designed for this talent are the roles that require a different degree of investment from all others throughout the entire talent life cycle. This is the lynchpin to a talent strategy and a convincing investment plan for Talent Acquisition, Talent Management, and the rest of HR. With the right dose of financial discipline, HR can be uniquely positioned to express talent investments in these terms. Although management intuitively understands this dynamic, they have to see it in HR plans. Without it, they will react with uncertainty and non-commitment. Anything short of this rational thinking feels like a cost rather than investment proposition.

In summary, the 5 steps to creating an effective HR investment plan are:

1. State your understanding of how the business creates value for shareholders
2. Distinguish the most important elements of value in this equation
3. Identify and connect roles that are critical* to the value creation process (acknowledging all roles are important, to a different degree, and otherwise would not exist)
4. Be explicit about investments that are required to ensure the best talent for critical roles*
5. Quantify those investments in the context of critical talent and define the related returns

Step 5 is instrumental in winning the Finance vote. Because of the nature of critical roles, HR calculations that would otherwise be unconvincing become convincing if focused on these. For example, quantifying the impact of higher quality talent becomes less of a leap of faith for critical roles than for all roles in general, and so on and so forth. Finance people and CEOs do not react favorably to the rote averaging that has become a way of life in traditional HR analysis. They want rational, pointed analysis and self-evident conclusions.

With the reality of intellectual capital’s preeminence in driving business value, HR’s role in creating business success has never been greater. It’s time to break the mold and behave like an investment – rather than sunk cost. Now’s the time to be an HR 2021 budget genius.

* Critical roles have a direct link and are dedicated to the work stream that creates or sustains a particular component of intellectual capital; these are usually primary rather than supporting roles. Getting and retaining the best talent for these roles is imperative to growing value.