Why do some industries spend more on HR than others?

Not all human resource initiatives are built the same. Some organizations choose to invest significantly more resources into their HR department and talent management, and achieve substantial benefits as a result.

Likewise, some industries and sectors place more of an emphasis on HR than others.

As I noted in the first article of this series, recent research from Bersin by Deloitte revealed that the average HR budget across U.S.-based enterprises rose by 4 per cent in 2014, reaching $2,936 per employee.

This was largely attributed to an increase in turnover in 2013 following the global financial crisis that resulted in many organizations taking reactive measures to improve attrition. But not all industries displayed the same spending behavior. Why are some industries choosing to cut HR budgets when others are increasing spending in this critical component of business? And what can the answer teach you about HR spending within your own organization?

Sector Distinctions

The Bersin by Deloitte report showed that some industries invested significantly more or less than the average values. For example, companies in the financial services sector ramped up HR spending by an average of 10 percent. These businesses spent around $3,729 per employee on HR in 2014 – 27 percent more than the average for businesses across all sectors.

In contrast to this is the retail sector, where Bersin estimated HR budgets were down 4 percent across the board in 2014.

So what is driving this trend?

HR Budgets Often the First to Go

The fact of the matter is that HR initiatives are often the first area of business to come under the microscope when it comes time to review budget and spending. 

HR departments are increasingly being asked to do more with less. The trend is a global one, with reports such as a 2015 study from KPMG Russia revealing intentions to reduce HR budgets while attempting to increase the productivity of the workforce. Specifically, more than half (58 percent) of surveyed companies in Russia and abroad plan to decrease their HR budgets in 2015, while most also intend to “optimize HR costs” and “increase staff efficiency”.

With these factors in mind, it’s not hard to see why some sectors may be investing less in HR than others: As they come under other pressures, they may choose to put fewer resources towards their talent and performance management strategies.

In the retail sector, for example, Bersin noted that many businesses were forced to cut expenses in the wake of increasing online shopping. According to eMarketer, e-commerce spending was up 16.9 percent in the U.S. in 2013, and this number likely only increased further in the 12 months since.

However, this is a short-sighted and often dangerous approach to budgeting.

HR During Times of Trouble

Strong HR departments and well-equipped talent management strategies are often most essential during times of business uncertainty, when motivating employees becomes difficult. And, to achieve goals such as increasing staff efficiency, organizations need strong training and engagement programs so they can unleash the full potential of their workforce. Failing to meet the needs of staff, on the other hand, may drive them to look for other opportunities.

Therefore, organizations considering cuts to their HR budgets due to external pressures need to first ask themselves why. What are we hoping to gain out of this change in spending? Where are we intending to redirect these resources? Are we best positioning ourselves for long-term gain?

From there, it is important for HR departments to have frank conversations with budget decision makers about the value they provide to the organization. In the final article of this series, I’ll take a look at how you can start these discussions.

Related Post: Is Your Organization Investing Enough in HR?

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