The Chopping Block: What’s Behind the Push for HR Budget Cuts?

“The majority of CFOs believe HR is ripe for budget cuts.”
— Bestin Samuel, senior principal analyst, Gartner

In a belt-tightening year, HR may be the corporate function that’s notching back the most.

According to Gartner research, just 29% of surveyed chief financial officers (CFOs) plan to increase their organization’s annual HR budget by 4% or more, placing the function behind sales, corporate IT, marketing, research and development, supply chain, legal and compliance, finance, and customer service and support when it comes to anticipated budget increases.

In addition, 57% of those CFOs told the research firm they planned some degree of HR budget cuts this year, with 22% of financial executives projecting reductions of 4% or more — the deepest cut to any organizational department.

“The majority of CFOs believe HR is ripe for budget cuts,” said Bestin Samuel, a senior principal analyst with Gartner’s HR Practice.

This article examines the back story, what it means for you and your team, and some action steps.

Access bonus Workspan Daily Plus+ articles on this subject:

• Devise, Prioritize, Optimize: An HR Toolkit for Shrinking Budgets
• When the Budget Is Under Pressure, Underscore HR’s True Impact
• To Protect Your HR Budget, You Need to Communicate Like a CFO

What’s Driving the Cuts

Why is this scenario occuring, when HR budgets grew more generously in recent years? There are a few factors at play, according to Samuel and WorldatWork content director Sue Holloway, CCP, CECP:

1. The cost of labor is surging, and HR budgets have heavy headcount concentrations.
2. Significant investments in artificial intelligence (AI) are commanding a larger share of budgets, putting pressure on the HR function to translate automation into lower labor costs.
3. Relative to the competitive post-pandemic years — which necessitated expanded HR budgets to contend with increased turnover and wage demands — today’s labor market is cooling.
4. Organizations are reallocating funds to other divisions viewed as more likely to generate swift, measurable revenue growth.

“HR is still too often viewed as a ‘support function,’ which makes it more vulnerable when organizations are prioritizing cutting expenses and cost discipline,” Holloway said.

Where to Go From Here

Since the bulk of HR budgets center around personnel and HR technology costs, it follows that those two areas stand to be the line items most impacted by cuts, Samuel said.

That said, HR teams navigating tightening budgets should take a measured approach.

“The biggest shift HR leaders need to make is to move away from proportional, sweeping, across-the-board budget cuts, which really undermine organizational performance,” Samuel said. “Because about 70% of the total HR budget is tied to personnel costs, such cuts tend to prompt blind headcount reductions. It’s not just about the technology, or your tools or products; it’s also about your people. Making drastic headcount cuts will often lead to more problems than gains.”

Now also is a time for HR professionals to find ways to communicate the value of their function — and to speak up in strategic business conversations, Holloway said.

“Budget pressure doesn’t reduce HR’s importance; it actually raises the stakes,” she said. “HR can leverage this moment to evolve from being seen as a cost center to being clearly positioned as a driver of organizational performance, especially through total rewards and workforce strategy.”

Editor’s Note: Additional Content

For more information and resources related to this article, see the pages below, which offer quick access to all WorldatWork content on these topics:

• Finance and Budgeting
• Organizational Performance
• Total Rewards