Author: indiafreenotes

Management Notes

Resourcing Strategy Meaning and Objectives

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A resourcing strategy and a recruitment policy helps you understand future staffing needs and work out how to ensure those needs are met. The policy should be consistent and transparent, reflect the organisation’s mission and values, and comply with employment law regulations.

The resourcing strategy broadly states the goals that the organisation aims to achieve through recruitment. This could be by external recruitment or developing existing employees; working with the whole organisation to understand its current and future needs; and ways of addressing resourcing (both by filling vacancies and also through the wider needs and expectations of candidates).

The policy should clearly set out the recruitment process; demonstrate consistency across the organisation’s sectors; extend information about the organisation’s recruitment strategy; and integrate with strategic and operational objectives. Finally, check that your resourcing policy chimes with your employer brand, and that your organisation is fulfilling those ambitions and values.

Components of a resourcing strategy include knowing the talents and skills you need to meet your business requirements; where and how to fill gaps; and how to fulfil your future talent needs:

  • Workforce planning: The number and type of employees required
  • Employee value proposition: The ‘give’ and the ‘get’
  • Resourcing plans: Where to find your people; learning and development offer
  • Retention: Being ‘an employer of choice’
  • Flexibility: Addressing hard-to-fill roles; offering different hours and work locations
  • Talent management and succession planning: What future talent does the business require and where will these managers come from?

Successful resourcing strategy include:

  • Ensure you have a ‘resourcing champion’ overseeing your strategy, whatever the size of your organisation
  • Refine the employer brand and employee value proposition (evp) to determine how you stand out against the competition
  • Build talent internally by adjusting existing roles, providing training, flexible working, or creating career paths to build loyalty and enhance your employer brand
  • Develop an internal pool of candidates by using internal referral schemes and contacting previous applicants
  • Consider establishing relationships with graduates, past employees and other contacts to provide a talent pool
  • Keep a schedule of hiring practices and expenditure to monitor the most successful and cost-effective channels and inform future strategy
  • When selecting a recruitment agency, look for one key expert in your industry that offers a genuine partnership, based on longer-term resourcing needs.

If there is more than one person in your organisation who can hire new recruits, make sure any changes to hiring processes are communicated effectively. It is important to have a clear understanding of the current marketplace and what your business may need in terms of talent for the short and long term. The same goes for your organisation’s targets, projects and relevant timescales, and how these link to future vacancies.

Process

  1. Have a Workforce Plan

Imagine if you never had a vacancy again. This may seem far-fetched but you can get pretty close by having a thorough Workforce Plan which considers the type of workforce you need for the future, the volume of people you need and where they are based, what skills they’ll have and where you can get them from. If you build in a proactive approach to recruitment where you plan for the future and know what roles you needed and when, you would be able to build pro-active talent pools and reduce the need for in the moment, requisition-led recruitment, which would in turn limit the number of vacancies you have.

A key part of the Workforce Plan is to have a detailed view of Succession. You can also use the succession process to scenario plan (who’s likely to leave), future-proof your business, plan development, keep an eye on talented individuals and identify internal and external replacements succession doesn’t just have to be internal, you can keep external talent warm too. In my view part one of a resourcing strategy is to minimise vacancies. Workforce Planning is the best way to do this.

  1. Know and communicate what you’re about.

I’m not a fan of HR jargon but in the trade, this would be referred to as a strong Employer Value Proposition. In essence this means being really clear on what you stand for as an employer and what the prospective employee will get in return for working from you, for example fast career progression, high pay, long hours or strong values, flexibility, a great environment. It is important that this is reflected in all your recruitment literature and job adverts. A strong and accurate proposition will help you attract the right people to your business.

  1. Be clear on the type of person you’re looking for.

In order to attract the right people, you’ve first got to be clear on the type of person you’re looking for. This means knowing the skills, qualifications, experience you need to be a success in the role and combine this with the values the person needs to work effectively in your business.

  1. Advertise your roles in the right place.

It seems pretty simple when you think about it. I’ve done a lot of work with some great marketing people recently who have helped me to identify the right channels and right places to advertise based on where the people I’m trying to attract look for jobs. For example, if I’m trying to attract people out of the city then I’ll advertise on the London tube, if I’m trying to attract rural people, I’ll look at Farmer’s Weekly, if it’s HR people then the CIPD etc.

If you’re using a recruitment partner/agent, then it’s critical that you pick the right one. One that shares your values and can represent your role and brand as well as you can. The partner you choose says a lot about you to your prospective future employee. It’s about more than just price.

  1. Stay in touch with second place.

It is about making sure you keep in touch with the good quality, unsuccessful applicants for roles in your business. This is a great way to keep a warm pool of high-quality people interested in your business who want to work for you. They might not have been successful this time but they could be great for future positions. Staying in touch could also help you build an external talent pool so you’re not always starting your recruitment search from a standing start.

  1. Have robust selection methods.

Build a selection process and method for assessing candidates that reflects and effectively tests the skills applicants will need to be a success in the role. Don’t just rely on an interview which can be subjective build a recruitment assessment process that tests on the job aptitude through practical assessments, numerical, verbal and psychometric assessments and use referencing from previous roles. If you’re relying on interviews then use competency-based interviewing to draw out real examples of when they’ve had success before.

Resourcing Types

Internal Recruiting: internal recruiting involves filling vacancies with existing employees from within an organization.

Retained Recruiting: When organization hire a recruiting firm, there are several ways to do so; retained recruiting is a common one. When an organization retains a recruiting firm to fill a vacancy, they pay an upfront fee to fill the position. The firm is responsible for finding candidates until the position is filled. The organization also agrees to work exclusively with the firm. Companies cannot, in other words, hire multiple recruiting firms to fill the same position.

Contingency Recruiting: like retained recruiting, contingency recruiting requires an outside firm. Unlike retained recruiting, there is no upfront fee with contingency. Instead, the recruitment company receives payment only when the clients they represent are hired by an organization.

Staffing Recruiting: staffing recruiters work for staffing agencies. Staffing recruiting matches qualified applicants with qualified job openings. Moreover, staffing agencies typically focus on short-term or temporary employment positions.

Outplacement Recruiting: outplacement is typically an employer-sponsored benefit which helps former employees transition into new jobs. Outplacement recruiting is designed to provide displaced employees with the resources to find new positions or careers.

Reverse Recruiting: refers to the process whereby an employee is encouraged to seek employment with a different organization that offers a better fit for their skill set.

Management Notes

Retention Strategies

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Retention Strategies are systematic methods used by organizations to retain talented and valuable employees and reduce employee turnover. These strategies focus on creating a supportive work environment, providing career growth, fair compensation, recognition, learning opportunities, work-life balance, and employee engagement. Effective retention strategies help organizations preserve experienced employees, reduce recruitment and training costs, maintain productivity, and strengthen organizational commitment.

Retention Strategies

1. Competitive Compensation and Benefits

Competitive compensation is an important employee retention strategy. Organizations should provide fair salaries, performance incentives, bonuses, allowances, health benefits, retirement benefits, paid leave, and other suitable benefits according to employee needs and market conditions. Employees are more likely to remain with an organization when they feel that their contributions are fairly rewarded. Regular salary reviews and transparent compensation policies can further improve satisfaction. A competitive compensation package helps organizations attract talented employees and reduces the possibility of employees leaving for better financial opportunities elsewhere.

2. Career Growth and Development

Providing career growth opportunities encourages employees to remain with the organization for a longer period. Employees should have clear career paths, promotion opportunities, internal mobility, and opportunities to take higher responsibilities. Career counselling and individual development plans can help employees understand how they can progress within the organization. When employees see opportunities for professional advancement, they are more likely to develop long-term commitment. Career growth also helps organizations retain experienced employees and prepare them for future managerial and leadership positions.

3. Training and Learning Opportunities

Regular training and learning opportunities can improve employee skills while increasing their connection with the organization. Organizations can provide workshops, technical training, online courses, mentoring, coaching, job rotation, and professional development programs. Learning opportunities help employees remain updated and prepare for changing job requirements. Employees often value organizations that invest in their development and future careers. Effective training also improves confidence, performance, and job satisfaction. Therefore, continuous learning can reduce employee turnover and support long-term employee retention.

4. Recognition and Rewards

Recognition and rewards are effective strategies for retaining employees because they make employees feel valued and appreciated. Organizations can recognize employees through awards, bonuses, certificates, appreciation messages, promotions, public recognition, or additional responsibilities. Recognition should be timely, fair, and connected to meaningful contributions. Employees who feel that their efforts are noticed are generally more motivated to continue performing well. A strong recognition system can improve morale, engagement, job satisfaction, and organizational commitment while reducing the desire to seek appreciation and opportunities elsewhere.

5. Work-Life Balance

Maintaining a healthy work-life balance is an important retention strategy. Organizations can support employees through flexible working arrangements, reasonable working hours, leave facilities, remote or hybrid work options where suitable, and supportive workplace policies. Excessive workload and continuous work pressure can contribute to dissatisfaction and employee turnover. Providing flexibility helps employees manage professional and personal responsibilities more effectively. A positive work-life balance can improve employee wellbeing, satisfaction, productivity, and commitment. Consequently, employees may be more willing to remain with an organization that respects their personal and professional needs.

6. Employee Engagement

Employee engagement involves creating an environment where employees feel connected to their work and organization. Organizations can improve engagement by involving employees in decision-making, encouraging communication, providing meaningful work, conducting employee surveys, and creating opportunities for participation. Engaged employees are more likely to demonstrate commitment, enthusiasm, and willingness to contribute to organizational objectives. Regular interaction between employees and management can also help identify concerns before they become reasons for resignation. Strong engagement therefore supports employee satisfaction, loyalty, productivity, and long-term retention.

7. Supportive Leadership and Management

Supportive leadership plays an important role in retaining employees. Managers should communicate clearly, treat employees fairly, provide constructive feedback, recognize achievements, and support employee development. Employees are more likely to remain when they have positive relationships with supervisors and feel respected in the workplace. Managers should also listen to employee concerns and help resolve workplace problems. Effective leadership creates trust and psychological safety while improving motivation and commitment. Therefore, developing supportive and employee-focused managers can significantly contribute to reducing employee turnover.

8. Job Security and Organizational Stability

Job security and organizational stability can encourage employees to remain with an organization. Employees prefer workplaces where employment policies are clear, management practices are consistent, and future business conditions appear reasonably stable. Organizations can improve security by communicating openly about major changes, providing skill-development opportunities, and supporting employees during organizational transitions. When employees feel confident about their future, they are more likely to invest their skills and efforts in the organization. Job security can therefore strengthen trust, commitment, satisfaction, and employee retention.

University of Mumbai BMS Notes

Rewards Strategies Meaning, Importance

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A total rewards strategy is a system implemented by a business that provides monetary, beneficial and developmental rewards to employees who achieve specific business goals. The strategy combines compensation and benefits with personal growth opportunities inside a motivated work environment.

Designing and implementing a total rewards strategy requires a large-scale approach that drives organizational change. Top executive and management buy-in are critical for the success of a total rewards strategy. Your project team should be made up of decision-makers as well as front-line employees to ensure that your approach is well-rounded and fits the needs of everyone at the table. If you operate in a union environment, it is important to understand that collective bargaining may affect the implementation of your strategy.

Developing a total rewards strategy is a four-step process consisting of:

Assessment: A project team assesses your current benefits and compensation system and determines the effectiveness of those systems in helping your company reach their goals. Activities that take place during the assessment phase of the process include surveying your employees on their opinions and beliefs regarding their pay, benefits and opportunities for growth and development as well as examining your current policies and practices. The most important outcome of the assessment phase is the project team assessment report, which includes your recommendations for the new total rewards system. The assessment report should include suggested solutions to questions such as:

  • Who should be eligible for the rewards?
  • What kinds of behaviors or values are to be rewarded?
  • What type of rewards will work best?
  • How will the company fund this?

Design: The senior management team identifies and analyzes various reward strategies to determine what would work best in their workplace. It decides what will be rewarded and what rewards will be offered to employees for those achievements. In a total rewards strategy, pay rewards for achievement of goals will not be the only consideration. HR strategists will also determine additional benefits (flexible work schedule, additional time off) or personal development opportunities (training or promotional) that employees will receive as a result of meeting the established company objectives.

Execution: The HR department implements the new rewards system. It circulates materials that communicate the new strategy to employees. Training also commences so that managers and decision-makers are able to effectively measure the achievement and employees are able to understand what they need to obtain to receive the rewards.

Evaluation: The effectiveness of the new plan must be measured and the results communicated to company decision-makers. Based on this, modifications can be proposed to the strategy for future implementation.

A total reward approach looks at what your organisation is trying to achieve, what your people want, what is affordable and the structures needed in place to achieve this. The four areas covered are:

  • Cash compensation

Every organisation must pay its employees for the services that they provide (i.e. time, effort and skills). This includes both fixed (salary and allowances) and variable (bonus and incentives) pay. The cash compensation provided to employees increases over time and can be linked to a number of different factors such as performance or career development.

  • Benefits

Organisations use benefits to supplement the cash compensation they provide to employees. These vary depending on the size of the organisation and affordability but can provide security and comfort to the employees and their families. The benefits include holidays, medical cover, income protection and pension schemes.

  • Personal Growth

Providing personal and professional growth opportunities to employees is an essential part of any reward strategy. These can be skills acquired on the job as well as formal training programmes valued by the employees that also serve the organisations strategic needs. Alongside this development, however, is the need to manage expectations, assessing performance and constantly striving to improve.

  • Work Environment

A positive work environment can often be the defining factor in retaining key talent in an increasingly competitive market. Ultimately, we all want to work in an environment where there is genuine feeling of team spirit and togetherness. With a leader that inspires and supports us to achieve success at both work and home.

University of Mumbai BMS Notes

Strategic Compensation as a Competitive Advantage

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The competitive advantage is a necessary component for the modern organization. The competitive advantage has to be in products, services, internal and external processes and in Human Resources Management. The employees are the assets of the organization and the competitive advantage in Human Resources Policies can generate a huge impact into the net profits and overall performance and profitability of the organization. The competitive advantage in compensation area usually generates a huge portion of the overall competitive advantage in HR Management.

The competitive advantage in the compensation area is not about beating the pay market by paying higher salaries and bonuses to all employees. The managers tend to think, the better the pay of employees, the more competitive the organization is. It is not true, the organization has to carry the higher personnel expenses and during the crisis or the recession, it can be a huge competitive disadvantage in the compensation and the compensation strategy has to be redesigned quickly as the organization can continue in its operation and it has a destroying influence on the overall employee satisfaction.

The competitive advantage can be built by using two general approaches:

  • General competitive position on the pay market
  • Competitive pay market position for key job positions

General competitive position on the pay market

Setting the higher position than the median on the pay market is quite common competitive advantage setting in smaller companies, who have to fight for the best talents with the big organizations in the same industry.

It is quite dangerous to set the pay market position too high as the organization has to carry the increased costs and eats more from the margins on the products and services. The organization cannot make quick changes and the recession can be deadly dangerous for the organization as it carries higher costs to keep the processes operating and functional. The competitors have a better and bigger space to decrease the personnel costs in bad times.

The higher competitive position on the pay market can be used in the time, the organization grows dramatically and it needs the best talents from the job market and there is no time to decide about the key job positions in the organization and all employees are treated to be of the same importance.

Keeping the long-term higher pay market position is suitable just for the companies in the modern industries, with high margins and the companies with the excellent brand name being known for employing the best of the best.

Competitive advance through strategic pay market position for key job positions

The competitive advantage in compensation can be set just for the key job positions in the organization. This solution is cheaper as the rest of the population can be kept in line with the median of the pay market or it can be below the median as the whole organization keeps the median in general. But, the organization has to be able to reach the consensus about the key job positions in the organization.

Setting the key job positions is the painful procedure for Human Resources getting the consensus from the top management is a bit mission impossible, but HR has to accomplish this procedure successfully as the key job positions are identified and Human Resources can set the right compensation strategy for the key job positions.

The differentiation in the compensation strategy and setting the different pay level for the key job positions is quite usual for the larger organizations as they save the personnel expenses and they are able to protect the key employees. It does not protect the key employees automatically, but it supports the managers and other HR Processes as the employees feel pretty satisfied with their salaries.

The competitive advantage for the key job positions is usually the best pay strategy for the mature organizations, which does not grow aggressively and are purely focused on the product innovations. The key employees bring the innovations and the rest is paid fair enough for their job content.

Strategies to Drive Performance & Satisfaction

In addition to ongoing industry efforts to address the labor shortage including education, technology, and promotion companies must assess their own operations to develop the kind of positive and productive work environments that both attract and retain high-level performers. An effective strategic reward system is fundamental to business performance.

While many executives realize that they need solid performance management and reward strategies and systems, too often they make the common mistake of rewarding one behavior when they actually seek a different outcome. According to Reward Systems: Does Yours Measure Up?, a successful performance system features three primary elements:2

1)  Define desired performance in tangible goals and actionable items.

2)  Measure the right things and use the right measurements.

3)  Reward the right measures with the right rewards.

Define

Rather than maintaining vague or intangible mission statements, management must take a hard look at the activities that drive desired results and, ultimately, economic value. “Unmatched customer service” is a great slogan for a motivational poster, but, “responding to customer complaints within 24 hours 100% of the time,” is a specific, measurable employee expectation.

Goals should be based on the demands of stakeholders – customers, suppliers, owners, and others. The CEO and owner must be kept informed of performance on all goals. To keep employees focused, driven, and not overwhelmed, many experts recommend a limit of 3-5 employee goals. While some organizations have 10-20 critical, actionable goals, these goals should be assigned only to the appropriate people with the responsibility to accomplish them. The CFO might be assigned goals that relate directly to profitability, whereas the controller’s goals may be more operational.

Measure

Ensuring success, both in terms of business growth and employee satisfaction, requires developing metrics that track actions and progress toward goals. The quality of metrics rests heavily on how well strategic performance is defined. As the saying goes, “you can expect what you inspect.” In most situations, the ability to measure outcomes drives results.

Implementing a new performance and reward system that includes tracking performance with hard data can be intimidating at first. One recommendation to help employees move beyond the initial psychological barrier of data-driven performance is to use data for developmental purposes in the beginning of the implementation phase of a new performance system. Metrics are only used in performance evaluations once employees understand the goals and measures that support them.

Beyond the well-known key performance indicators (KPIs) like profit and revenue, construction executives should also measure economic indicators based on employee performance. (See “Key Performance Indicators Are Not Just About Profit” by Shane Brown and Andrew Steger in the March/April 2013 issue.)

Reward

Once goals are defined and measurements are implemented, it is time to consider rewards. Performance rewards can be both financial and nonfinancial, and must reinforce the organization’s performance metrics and measure employee contributions. Companies often have the right long-term goals but mistakenly reward short-term objectives.

The more significant the reward, the more employees will consider how it is measured. In addition to the size/value of a reward, three other elements make rewards impactful:

  • Rewards that are highly visible are more powerful than hidden rewards.
  • Timing rewards in association with outcomes drives positive behavior. For example, a bonus that comes a month after a goal is achieved will have greater impact on employees than one that occurs months later.
  • Finally, staying power impacts reward power.

Bonuses, incentive pay, variable compensation, and compensation-at-risk are good methods for incentivizing positive behavior while preventing it from regressing.

Retooling a company’s performance strategy may seem daunting, but there is good news. It’s likely that competitors’ organization performance plans are not fully developed or implemented. This presents an important opportunity for companies to make a solid performance and reward system a distinctive competency and a competitive advantage. The remainder of this article will explore current tools and how your company can get strategic with its compensation.

University of Mumbai BMS Notes

Strategic HR Planning Meaning, Advantages

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Human Resource Strategy (HR Strategy) is a designation for a long-term plan created to achieve objectives in the field of human resource and human capital management and development in the organization. Human Resource strategy is one of the outputs of strategic management in the field of human resources management.

HR strategy in practice: Human Resource Strategy helps to unify and direct the behavior and actions of all people and their overall development in accordance with the needs of the organization. It allows a meaningful planning and management of all work with human resources.

  • Defines processes, responsibilities and requirements on recruitment and staff selection
  • Defines requirements on staff training and qualification development
  • Defines the way of management of work performance, motivating and rewarding people, social programs and employee benefits
  • Defines working conditions, labor relations and influences the way of organizing

Human resources strategy usually follows a global strategy and includes specific goals in human resources and a schedule for implementation through projects or other actions and tasks. Sometimes personnel audit can be part of developing a personnel strategy. When creating HR strategy, it is also used a number of analytical techniques and methods such as SWOT Analysis, VRIO Analysis, PESTLE Analysis and more.

HR Planning

Human Resource Planning (HRP) is the process of forecasting the future human resource requirements of the organization and determining as to how the existing human resource capacity of the organization can be utilized to fulfill these requirements. It, thus, focuses on the basic economic concept of demand and supply in context to the human resource capacity of the organization.

It is the HRP process which helps the management of the organization in meeting the future demand of human resource in the organization with the supply of the appropriate people in appropriate numbers at the appropriate time and place. Further, it is only after proper analysis of the HR requirements can the process of recruitment and selection be initiated by the management. Also, HRP is essential in successfully achieving the strategies and objectives of organization. In fact, with the element of strategies and long term objectives of the organization being widely associated with human resource planning these days, HR Planning has now became Strategic HR Planning.

Though, HR Planning may sound quite simple a process of managing the numbers in terms of human resource requirement of the organization, yet, the actual activity may involve the HR manager to face many roadblocks owing to the effect of the current workforce in the organization, pressure to meet the business objectives and prevailing workforce market condition. HR Planning, thus, help the organization in many ways as follows:

  • HR managers are in a stage of anticipating the workforce requirements rather than getting surprised by the change of events
  • Prevent the business from falling into the trap of shifting workforce market, a common concern among all industries and sectors
  • Work proactively as the expansion in the workforce market is not always in conjunction with the workforce requirement of the organization in terms of professional experience, talent needs, skills, etc.
  • Organizations in growth phase may face the challenge of meeting the need for critical set of skills, competencies and talent to meet their strategic objectives so they can stand well-prepared to meet the HR needs
  • Considering the organizational goals, HR Planning allows the identification, selection and development of required talent or competency within the organization.

It is, therefore, suitable on the part of the organization to opt for HR Planning to prevent any unnecessary hurdles in its workforce needs. An HR Consulting Firm can provide the organization with a comprehensive HR assessment and planning to meet its future requirements in the most cost-effective and timely manner.

An HR Planning process simply involves the following four broad steps:

  • Current HR Supply: Assessment of the current human resource availability in the organization is the foremost step in HR Planning. It includes a comprehensive study of the human resource strength of the organization in terms of numbers, skills, talents, competencies, qualifications, experience, age, tenures, performance ratings, designations, grades, compensations, benefits, etc. At this stage, the consultants may conduct extensive interviews with the managers to understand the critical HR issues they face and workforce capabilities they consider basic or crucial for various business processes.
  • Future HR Demand: Analysis of the future workforce requirements of the business is the second step in HR Planning. All the known HR variables like attrition, lay-offs, foreseeable vacancies, retirements, promotions, pre-set transfers, etc. are taken into consideration while determining future HR demand. Further, certain unknown workforce variables like competitive factors, resignations, abrupt transfers or dismissals are also included in the scope of analysis.
  • Demand Forecast: Next step is to match the current supply with the future demand of HR, and create a demand forecast. Here, it is also essential to understand the business strategy and objectives in the long run so that the workforce demand forecast is such that it is aligned to the organizational goals.
  • HR Sourcing Strategy and Implementation: After reviewing the gaps in the HR supply and demand, the HR Consulting Firm develops plans to meet these gaps as per the demand forecast created by them. This may include conducting communication programs with employees, relocation, talent acquisition, recruitment and outsourcing, talent management, training and coaching, and revision of policies. The plans are, then, implemented taking into confidence the mangers so as to make the process of execution smooth and efficient. Here, it is important to note that all the regulatory and legal compliances are being followed by the consultants to prevent any untoward situation coming from the employees.

Strategic HR Planning

Strategic HR planning is an important component of strategic HR management. It links HR management directly to the strategic plan of your organization. Most mid-to large sized organizations have a strategic plan that guides them in successfully meeting their missions. Organizations routinely complete financial plans to ensure they achieve organizational goals and while workforce plans are not as common, they are just as important.

Even a small organization with as few as 10 staff can develop a strategic plan to guide decisions about the future. Based on the strategic plan, your organization can develop a strategic HR plan that will allow you to make HR management decisions now to support the future direction of the organization. Strategic HR planning is also important from a budgetary point of view so that you can factor the costs of recruitment, training, etc. into your organization’s operating budget.

Strategic HR management is defined as:

Integrating human resource management strategies and systems to achieve the overall mission, strategies, and success of the firm while meeting the needs of employees and other stakeholders.

Strategic HR planning

The overall purpose of strategic HR planning is to:

  • Ensure adequate human resources to meet the strategic goals and operational plans of your organization the right people with the right skills at the right time
  • Keep up with social, economic, legislative and technological trends that impact on human resources in your area and in the sector
  • Remain flexible so that your organization can manage change if the future is different than anticipated

Strategic HR planning predicts the future HR management needs of the organization after analyzing the organization’s current human resources, the external labour market and the future HR environment that the organization will be operating in. The analysis of HR management issues external to the organization and developing scenarios about the future are what distinguishes strategic planning from operational planning.

The basic questions to be answered for strategic planning are:

  • Where are we going?
  • How will we develop HR strategies to successfully get there, given the circumstances?
  • What skill sets do we need?

The strategic HR planning process

  • The strategic HR planning process has four steps:
  • Assessing the current HR capacity
  • Forecasting HR requirements
  • Gap analysis
  • Developing HR strategies to support organizational strategies
Management Notes

Strategic Human Resource Development, Meaning, Process and Importance

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Strategic Human Resource Development (SHRD) is a planned and systematic approach to developing employees in line with an organization’s long-term goals and business strategy. It focuses on improving employees’ knowledge, skills, abilities, attitudes, and competencies. Strategic HRD ensures that training and development activities are directly connected with organizational requirements. It considers both present and future workforce needs and prepares employees to respond effectively to changes in technology, competition, markets, and organizational objectives.

Objectives of Strategic Human Resource Development

  • Align HRD with Organizational Strategy

The primary objective of Strategic HRD is to align employee development with the organization’s mission, vision, goals, and business strategy. HRD programmes are designed according to the competencies required to achieve strategic objectives. This alignment ensures that training, career development, leadership development, and performance improvement contribute directly to organizational priorities. It also helps employees understand how their individual roles support broader organizational goals. Thus, Strategic HRD makes human resource development an important part of strategic management and organizational success.

  • Develop Employee Competencies

Strategic HRD aims to develop the knowledge, skills, abilities, attitudes, and competencies required for effective employee performance. Organizations identify existing competency gaps and provide appropriate training and development opportunities to overcome them. Employees are also prepared to handle future responsibilities and changing work requirements. Competent employees can perform their duties more efficiently, solve problems effectively, and contribute innovative ideas. Therefore, developing employee competencies enables organizations to build a skilled workforce capable of supporting present and future strategic requirements.

  • Improve Employee Performance

Improving employee performance is an important objective of Strategic HRD. Performance appraisal, feedback, coaching, training, and development programmes are used to identify performance gaps and improve employee capabilities. Strategic HRD ensures that individual performance targets are connected with organizational objectives. Employees receive appropriate guidance and opportunities to improve their effectiveness. Better employee performance leads to increased productivity, efficiency, quality, and achievement of organizational goals. Thus, SHRD creates a systematic connection between employee development and improved organizational performance.

  • Develop Future Leaders

Strategic HRD aims to identify and develop employees who have the potential to become future leaders. Leadership development programmes, mentoring, coaching, job rotation, challenging assignments, and succession planning help employees develop decision-making, communication, strategic thinking, and team-management skills. Developing future leaders ensures that competent individuals are available for important positions when required. It also supports organizational continuity and reduces dependence on external recruitment for leadership roles. Therefore, SHRD builds a strong leadership pipeline for long-term organizational success.

  • Support Career Development

Strategic HRD seeks to support employees in achieving their career aspirations while meeting organizational workforce requirements. Career planning, counselling, mentoring, job rotation, promotions, and development programmes help employees understand and prepare for future career opportunities. When employees receive clear growth opportunities, their motivation, satisfaction, and commitment may increase. Career development also helps organizations retain talented employees and prepare them for higher responsibilities. Thus, SHRD connects individual career goals with organizational talent requirements and future strategic needs.

  • Promote Organizational Learning

Strategic HRD aims to develop an organizational culture where continuous learning, knowledge sharing, and improvement are encouraged. Employees learn through training, experience, teamwork, mentoring, feedback, and organizational activities. Knowledge gained by individuals can be shared with others to improve organizational capabilities. Organizational learning also helps organizations respond effectively to new technologies, changing markets, and competitive pressures. Therefore, SHRD promotes continuous learning and knowledge development, enabling organizations to become more adaptable, innovative, and capable of achieving long-term objectives.

  • Facilitate Organizational Change

Strategic HRD helps organizations prepare employees for planned and unplanned changes. Changes in technology, business strategies, customer expectations, competition, and market conditions require employees to develop new skills and behaviours. SHRD provides training, communication, coaching, counselling, and other development interventions to improve employee readiness. By reducing uncertainty and resistance, employees become more willing to accept new systems and responsibilities. Therefore, Strategic HRD supports successful change management and strengthens organizational adaptability in a continuously changing business environment.

  • Encourage Innovation and Creativity

Strategic HRD aims to encourage employees to develop creative ideas, innovative approaches, and new solutions to organizational problems. Training, brainstorming, challenging assignments, teamwork, knowledge sharing, and supportive leadership can stimulate innovative thinking. Employees are encouraged to experiment, learn from experiences, and suggest improvements in products, services, and processes. Innovation helps organizations respond to competition and changing customer needs. Therefore, SHRD creates conditions that develop employee creativity and transform individual ideas and capabilities into organizational innovation.

  • Retain and Develop Talent

Strategic HRD aims to retain talented and high-performing employees by providing meaningful development and career opportunities. Training, mentoring, career planning, recognition, leadership development, and challenging assignments encourage employees to build their careers within the organization. Retaining skilled employees reduces the costs and disruptions associated with employee turnover. SHRD also identifies high-potential employees and prepares them for critical organizational roles. Therefore, effective strategic development helps organizations preserve valuable knowledge, strengthen their talent pool, and maintain workforce stability.

Process of Strategic Human Resource Development

Step 1. Analysis of Organizational Strategy

The process of Strategic HRD begins with understanding the organization’s mission, vision, objectives, and long-term business strategy. HRD managers identify the organization’s future direction and determine what human capabilities will be required to achieve strategic goals. Factors such as technological changes, competition, market conditions, and organizational growth are also considered. This analysis provides the foundation for designing HRD activities. Therefore, strategic analysis ensures that employee development programmes are directly connected with the overall strategic requirements of the organization.

Step 2. Identification of HRD Needs

After understanding organizational strategy, HRD needs are identified at organizational, departmental, and individual levels. The organization determines the knowledge, skills, abilities, and competencies required for present and future jobs. Performance appraisal, competency assessments, interviews, surveys, and training-needs analysis can be used to identify gaps. These gaps indicate areas where employees require development. Proper identification of HRD needs ensures that resources are directed toward relevant development activities and helps the organization prepare employees for strategic challenges.

Step 3. Setting HRD Objectives

Once development needs are identified, specific HRD objectives are established. These objectives describe what employees should learn, develop, or achieve through HRD interventions. Objectives may include improving technical skills, developing leadership capabilities, increasing productivity, supporting career growth, or preparing employees for organizational change. HRD objectives should be clear, measurable, and connected with organizational strategy. Well-defined objectives provide direction for HRD programmes and make it easier to evaluate whether development activities have achieved their intended results.

Step 4. Designing HRD Programmes

The next step involves designing appropriate HRD programmes according to identified needs and objectives. Programmes may include training, coaching, mentoring, career development, leadership development, job rotation, succession planning, and organizational development interventions. The content, methods, duration, participants, trainers, and required resources are determined during this stage. The design should consider both employee needs and organizational priorities. Effective programme design ensures that employees receive relevant learning experiences that contribute to improved competencies and strategic organizational performance.

Step 5. Implementation of HRD Programmes

Implementation involves putting the planned HRD programmes into practice. Training sessions, workshops, coaching, mentoring, development assignments, and other interventions are conducted according to the established plan. HRD managers coordinate trainers, employees, schedules, resources, and facilities. Management support is important for successful implementation because employees need time and resources to participate. Effective implementation ensures that development opportunities reach the intended employees and that learning activities are conducted in an organized manner.

Step 6. Employee Learning and Development

During implementation, employees acquire new knowledge, skills, attitudes, and competencies through various learning methods. These may include classroom training, practical exercises, e-learning, mentoring, coaching, simulations, and workplace assignments. Employees are encouraged to apply their learning to actual job situations. Strategic HRD emphasizes continuous development rather than one-time training. Successful learning improves employee competence and prepares employees to perform present responsibilities more effectively while developing capabilities required for future organizational needs.

Step 7. Performance Improvement

Strategic HRD focuses on applying acquired knowledge and skills to improve workplace performance. Employees are encouraged to use their newly developed competencies in their jobs and contribute to organizational objectives. Managers provide feedback, guidance, coaching, and support to help employees improve their performance. Performance indicators can be used to assess changes in productivity, quality, efficiency, and effectiveness. Thus, performance improvement connects employee development directly with organizational strategy and demonstrates the practical value of Strategic HRD.

Step 8. Evaluation of HRD Programmes

Evaluation determines whether HRD programmes have achieved their intended objectives. Organizations assess employee learning, behavioural changes, performance improvements, and organizational outcomes. Feedback from participants, managers, trainers, and other stakeholders can be collected to measure programme effectiveness. Evaluation also helps identify whether the training investment has produced meaningful results. If expected outcomes are not achieved, HRD programmes can be modified. Therefore, systematic evaluation ensures accountability and helps organizations improve the quality and effectiveness of their HRD activities.

Step 9. Feedback and Continuous Improvement

Feedback is an essential part of the Strategic HRD process. Information obtained from employees, managers, performance results, and programme evaluations is used to identify areas requiring further improvement. HRD managers modify development programmes according to changing employee and organizational requirements. Continuous feedback ensures that HRD remains relevant and responsive to business conditions. It also creates a cycle of learning and improvement. Therefore, feedback helps organizations continuously strengthen employee capabilities and maintain alignment between HRD activities and strategic objectives.

Step 10. Strategic Review and Renewal

The final stage involves reviewing HRD outcomes in relation to the organization’s changing strategic requirements. Management examines whether employee capabilities are sufficient to support future objectives and identifies new development priorities. Changes in technology, markets, competition, and organizational strategy may create new competency requirements. HRD plans are therefore revised and renewed periodically. This makes Strategic HRD a continuous process rather than a one-time activity. The cycle begins again with new needs, objectives, programmes, implementation, evaluation, and improvement.

Importance of Strategic Human Resource Development

  • Alignment with Organizational Strategy

Strategic HRD connects employee development with the organization’s mission, vision, objectives, and long-term business strategy. It ensures that training and development activities focus on competencies required to achieve strategic goals. Employees understand how their individual contributions support organizational priorities. This alignment prevents HRD activities from becoming isolated programmes and makes them strategically relevant. Therefore, Strategic HRD helps organizations develop human resources according to present requirements while preparing employees for future challenges and opportunities.

  • Development of Employee Competence

Strategic HRD is important for developing employee knowledge, skills, abilities, and attitudes. Organizations identify competency gaps and provide appropriate training, coaching, mentoring, and development opportunities. Employees become better equipped to perform their responsibilities and handle changing workplace requirements. Continuous competency development improves confidence, productivity, efficiency, and work quality. It also prepares employees for higher responsibilities. Thus, Strategic HRD ensures that organizations have a skilled workforce capable of supporting both current operations and future strategic objectives.

  • Improvement in Employee Performance

Strategic HRD improves employee performance by connecting development activities with specific organizational and job requirements. Performance appraisal, feedback, coaching, training, and development programmes help employees identify weaknesses and improve their capabilities. Employees learn to perform tasks more effectively and achieve established performance standards. Improved individual performance contributes to departmental and organizational results. Therefore, Strategic HRD creates a systematic relationship between employee development and performance improvement, resulting in higher productivity, efficiency, quality, and achievement of organizational goals.

  • Leadership Development

Strategic HRD plays an important role in developing current and future organizational leaders. Leadership training, mentoring, coaching, job rotation, challenging assignments, and succession planning prepare employees for managerial responsibilities. Potential leaders develop decision-making, communication, strategic thinking, problem-solving, and team-management abilities. Effective leadership development ensures that competent employees are available to occupy critical positions in the future. Consequently, Strategic HRD strengthens the leadership pipeline, supports organizational continuity, and reduces the risks associated with sudden leadership vacancies.

  • Employee Career Development

Strategic HRD supports employees in planning and developing their careers within the organization. Career counselling, mentoring, training, job rotation, promotions, and development assignments provide employees with opportunities for professional growth. When employees see clear career opportunities, they are more motivated and committed to their organization. Career development also enables organizations to identify and prepare employees for future positions. Therefore, Strategic HRD creates a balance between individual career aspirations and organizational workforce requirements, benefiting both employees and the organization.

  • Promotion of Organizational Learning

Strategic HRD promotes organizational learning by encouraging continuous acquisition, sharing, and application of knowledge. Employees learn through training, experience, teamwork, mentoring, feedback, and workplace activities. Knowledge sharing enables organizations to preserve valuable expertise and improve organizational capabilities. A learning-oriented organization can respond more effectively to technological developments, market changes, and competitive pressures. Thus, Strategic HRD creates an environment where learning becomes a continuous organizational process, supporting innovation, adaptability, knowledge development, and long-term organizational effectiveness.

  • Facilitation of Organizational Change

Strategic HRD helps organizations prepare employees for changes in technology, business processes, strategies, markets, and customer expectations. Training and development programmes provide employees with the knowledge and skills required to adopt new systems and methods. Coaching, communication, and counselling can also reduce uncertainty and resistance to change. Employees become more adaptable and confident during organizational transitions. Therefore, Strategic HRD facilitates successful change management by developing employee readiness and organizational capabilities needed to respond effectively to a changing business environment.

  • Employee Motivation and Commitment

Strategic HRD increases employee motivation and commitment by demonstrating organizational investment in employee growth and development. Training, career opportunities, recognition, challenging assignments, and mentoring make employees feel valued and supported. Employees who receive development opportunities are more likely to participate actively and contribute toward organizational objectives. HRD also improves job satisfaction by helping employees achieve personal and professional goals. Therefore, Strategic HRD strengthens employee motivation, involvement, loyalty, and commitment while supporting better organizational performance.

  • Talent Retention and Management

Strategic HRD helps organizations attract, develop, and retain talented employees. High-potential employees can be identified and provided with specialized training, mentoring, career development, and leadership opportunities. When talented employees receive meaningful growth opportunities, they are more likely to remain with the organization. Effective talent development also ensures that critical positions can be filled internally by qualified individuals. Therefore, Strategic HRD reduces employee turnover, preserves valuable organizational knowledge, develops internal talent, and strengthens the organization’s long-term human resource capabilities.

University of Mumbai BMS Notes

Strategic Recruitment and Selection Meaning and Need

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The strategic recruitment is a distinctive part of the recruitment process. Not all the job positions in the company are strategic; they are not crucial for the business operation. The strategic recruitment is focused purely on the key job positions in the organization. It is focused on the hiring of the job positions needed for the accelerated growth of the business. The strategic recruitment can be a separate process from the usual recruitment process for the mass job positions. The difference between the tactical and strategic recruitment exists.

The recruitment strategy defines the different recruitment channels and different recruitment measures. The strategic recruitment is usually reported to the top management. It is designed to react quickly on the changed circumstances on the job market, and it supports the growth of the organization in key business areas. The recruitment KPIs are adjusted for the key job positions as measures reflect the importance (shorter recruitment cycle time and higher recruitment costs accepted).

The recruitment strategy is a steering wheel for the strategic recruitment. The managers tend to mark all job vacancies as the strategic ones. The HR Recruiters have to face them with the real story. The organization defines the strategic recruitment, not the line management. The line managers have to accept the fact of not being as strategic as another department can be.

It is the key secret of the strategic recruitment. It is extremely selective. The part of the strategic recruitment can be up to 5% – 10% of all job vacancies in the organization. They are different every year. They depend on the business strategy. The organization grows, and it changes its strategic imperatives and initiatives. The strategic recruitment sources those initiatives.

There is no manager in the organization, who drives the strategic initiatives all the time. The initiatives change. The priorities change. The job positions to be considered strategic has to be re-evaluating at least twice a year.

HR has to act independently. The selection of strategic job positions to be hired is not easy. Managers push to demonstrate their strategic role in the organization. HR has to demonstrate support for the daily operational recruitment, and it has to point the strategic job positions with the special care.

HR cannot hire all job positions as strategic ones. The costs would exceed the recruitment budget quickly. The strategic recruitment is expensive. The top management closely monitors it. It can be monitored as the top managers can recognize the importance of the job positions for the organization. They can lose the commitment, when all job positions are strategic.

Because the rotation of employees is easily eliminated, facilitating the election of the candidate who not only possesses the necessary competences to fulfill the position, but also possesses the core values ​​of the Company.

The main objective of Recruitment and Selection is an organized, transparent and fair recruitment process to incorporate the right people in the Company.

The strategic importance of the Recruitment and Selection Process gives to the Companies the following benefits:

  • Help build your brand as an employer. When a Company begins to hire, the public, potential candidates and the Market observe it.
  • Reduces turnover and increases employee morale. When an Organization hires the right people, the end result is happier workers doing meaningful work.
  • Attracts important group of applicants. A planned recruitment effort includes identifying the best methods to surch the most qualified candidates.
  • Hiring speed. A well-designed Recruitment and Selection Process quickly resolves a vacancy. Therefore, the interruption in production or services due to lack of personnel, can be completely controlled or eliminated.
  • The success of a Company is guaranteed with the best employees, when they are happy and doing a meaningful job.

Identifying Needs

Strategic management begins with identifying the needs of your organization as they relate to current and future labor demands. Accomplishing this task requires the ability to identify the various jobs and roles needed within your organization to meet current and future goals related to production and growth, and speaking with other leadership personnel within your company, according to Lever. Once these roles are identified, clear and concise job descriptions and duties can help ensure that recruitment remains streamlined and aimed at efficient recruitment and hiring.

Recruitment Activities

Hiring managers should focus on recruiting activities aimed at attracting the right candidates for the job. Recruiting activities can include internal efforts, college hiring fairs, technical and vocational events, and traditional newspaper advertisements. Based on the needs of current openings and forecasts for future needs, a hiring manager will need to direct efforts toward the best option for recruiting the right candidates. For instance, focusing on college hiring fairs and traditional newspaper advertisements is appropriate for entry-level positions with your company.

Selection Process

Selecting the right candidate requires identifying the specific skills, knowledge and qualities you seek and desire in an employee. This can pertain to the necessary skills and knowledge for the position itself, such as a specific degree or certification, and the desired personal qualities, such as a preference to hire employees with good moral and ethical standards. Other important parts of the selection process include conducting any necessary aptitude tests and conducting a thorough background check to ensure the employee meets the basic qualifications of both the position and the company.

The role of the HR manager in the recruitment and selection process is to help run the day-to-day of recruitment. Consult with her to make sure you are on the same page with what you are looking for; use her for insights from her perspective. The relationship between recruitment and selection should be smooth and efficient with proper communication.

University of Mumbai BMS Notes

Strategies for Enhancing Employee Work Performance

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  1. Make Clear Goals and Expectations

Are your team members aware of what their goals and expectations are? Do they know when you expect goals to be met? How do you know?

Involve individual employees in their own goal-setting process to give them autonomy over their goals. A work environment that actively involves employees in goal-setting can also improve employee engagement and motivation.

If you are dealing with performance issues with a particular team member, make sure to be specific. For example, if you discover a direct report is frequently taking two-hour lunches, don’t tell them to take ‘shorter lunches.’ Tell him or her to keep their lunch break to an hour and consider making them document their lunch breaks or clock in and out of work.

  1. Empower Employees to Do Their Best Work

People do their best work when they are engaged and motivated. Invest in your employees’ long-term career in the organisation. Develop a plan for moving up within the company and provide the resources and training that will develop staff into talented leaders in the long run.

Your team members will need new skills and habits as they advance. Help employees secure those skills by allocating budget dollars towards workshops, professional development courses, conferences and certifications so they can reach their full potential.

  1. Hold Team Members Accountable to Goals

Imagine someone asks a direct report to do something even if it’s a clear goal with a set deadline and they don’t do it, but receive no consequence.

What happens next?

Over time, the employee will learn it doesn’t matter if they slack off or have to be reminded. Performance is likely to suffer.

Team members require crystal clear communication about their responsibilities and need to be held accountable. Be sure to communicate with your employees and don’t be afraid to dole out warnings and consequences when they are earned. If certain employees fail to deliver, consider implementing a performance improvement plan. If they don’t improve, it may be time to show them the door.

  1. Reward High Performance

A common problem in many organisations is that leaders spend their time trying to get low-performing team members to improve and recruiting new talent, ignoring high performers because they don’t cause problems. This is a dangerous oversight!

Over time, high performers will become disengaged and less motivated if they don’t feel like their efforts are appreciated. Furthermore, high performers are in high demand! You could lose them to competitors if you don’t recognise their hard work.

There’s no shortage of ways to reward an employee and thank them for a job well done. Gifts, bonuses, promotions, extra time off, public praise and extra benefits are all effective ways to reward high performers and keep them motivated.

  1. Foster a Fun, Positive Work Environment

It’s no secret that happy employees are more engaged, productive and motivated team members. Be sure employees get to let loose occasionally and have some fun. Sponsor a monthly potluck, host ‘get to know you’ activities outside of the office or plan a trivia event at work to let team members develop a rapport and relationship with one another.

Encourage an organisational culture where employees feel safe to speak up and voice their opinions, regardless of their rank or position in the company. When people feel their ideas and opinions are valued, they are more likely to participate and be engaged with the mission of the organisation.

  1. Increase Job Satisfaction

Do a market analysis to see how your organisation stacks up to your competitors. Do you offer competitive benefits and perks? Are your salaries higher or lower than other businesses in your industry? What kind of office environment do you have?

The best way to find out if your benefits and perks are affecting employee performance and motivation is to ask your teams. Have employees complete an anonymous survey to determine what is most important to them.

  1. Consider Remote Working Options

In today’s society, flexible schedules matter more than ever for busy business professionals. Contrary to popular belief, giving team members the ability to work from home won’t make them less productive.

Research shows that employees who work remotely are 13 percent more productive than their office-working counterparts, and they spend the time would they spend commuting focusing on work.

For example, if one of your team members doesn’t feel well enough to come to the office (and doesn’t care to spread their germs) but they can still get work done, let them work from home rather than take a sick day and accomplish nothing. If someone has a home delivery or repair, they need to be home for, let them work remotely so they can stay productive and not use all of their paid time off.

  1. Use the Right Technologies

A big part of employee performance is measuring performance. While many companies still rely on annual performance reviews and performance management systems to assess performance, new technologies are available that help measure performance more accurately on an ongoing basis.

Social performance management software that harnesses the power of Promise-Based Management to help teams create and track progress towards goals and collaborate more effectively. Employees make promises to one another in a transparent place so everyone knows who is responsible for what and when it should be accomplished.

Techniques to Improve Employee Performance

Once you get a handle on what is causing employees to underperform, you can target solutions to address those issues. Here are six ideas to help you manage and improve employee performance in your organization.

  1. Communicate clear expectations.

Making sure employees are clear about their work assignments means communicating those expectations well. Continue to manage what is expected through frequent communications.

If employees can explain objectives in their own words, it is a good chance that they know what to do and how to get it done.

  1. Make sure performance appraisals are consistent.

Regular and timely appraisals ensure employees know where they stand at all times. Conducting performance appraisals regularly also keeps goals in the forefront of daily tasks.

  1. Make employee development a priority.

“Where do you see yourself in five years?” This is a common interview question. Now that five years have passed, has your employee’s career goals been achieved? Or, are they still striving to reach their full potential within the organization?

If they are, maybe this is a good time to readdress those goals and plan accordingly. Work to close any skills gaps that will not only help them achieve long-term goals but will also benefit your company when their skills help you fulfill business objectives.

  1. Take steps toward improving morale.

Employees perform better when they are satisfied with their job. Review things such as:

  • Work environment
  • Benefits
  • Salary level
  • Employee understanding of the mission and vision

Employees who understand how their role helps the company succeed are often more willing to do their very best.

  1. Empower employees to do their jobs well.

Empowering employees can take on many forms as they gain the authority to make decisions that have a huge impact on their success.

Whether it is giving them input on goals and objectives, or allowing them to access their data without going to HR, minor roadblocks will not impede their progress. They have the resources they need, yet know they are held accountable without being micromanaged.

  1. Utilize the right technologies.

Implement technology platforms that drive performance and engagement daily. Technology is crucial in today’s workforce, especially if you have a decentralized staff.

Mobile employees remain part of the team through powerful communication channels to keep everyone on the same page.

Organizational success thrives when the right rules and systems are in place. Simply wanting to know how to improve employee performance without including employee considerations may not help you achieve set goals.

Create times to have regular meetings and discussions perhaps not waiting until performance appraisal day to talk about areas of concern.

Waiting until your company experiences massive losses is the worst time to swing into action. Begin early, at the first sign of trouble, to determine the most effective ways to change an underperforming workforce into a solid team.

Management Notes

Difference between Depreciation, Amortization and Depletion

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Depreciation

Depreciation is the accounting term used for assets such as buildings, furniture and fittings, equipment etc. Companies use this to record the diminishing value of their assets as they are used in the business from the time of purchase of such assets. Hence cost is allocated periodically as value lost due to usage (as expense affecting the business’s net income) and the declining value of assets is recorded (affecting the value of business). Different methods exist in calculating the depreciation amount and these are different depending on the asset type. The depreciation is calculated from the time an asset is used / placed for service and the depreciation is recorded periodically. Depreciation is calculated taking the cost of the asset, the expected useful life of the asset, residual value of the asset and percentage where necessary. Depreciation is not taken into account once the full cost of the asset is recovered / the asset is no longer in the company’s possession (i.e. sold, stolen and fully depreciated). Two main ways exist in calculating depreciation and they are the straight line (which allows deducting the same amount each year over the life of the asset) and reducing balance method / declining balance method (which provides for a higher charge in the first year and reducing amount throughout the asset life).

Depletion

Depletion is an accounting concept which is used mostly in mining, timber, petroleum or other similar industries. Being similar to depreciation, depletion allows accounting for the reduction of the resource’s reserve. There are two main types of depletion calculation: cost depletion (where cost of the resource allocated over the period) and percentage depletion (the percentage of the property’s gross income where percentage is specified for each mineral).

When dealing with a natural resource also referred as a mineral asset the concept of depreciation or amortization cannot be applied. “Depletion” is a form of a systematic reduction in the value of a natural resource based on the rate at which it is being used.

For example: A coal mine has 10 Million tonnes of coal and the coal extraction is happening at the rate of 1 Million tonnes per year. In this case, depletion rate would be 10% p.a. since at this rate of extraction the coal mine is being depleted at 10% per year.

Though both have similar concepts, difference between depreciation and depletion exist as mentioned below.

  1. Depreciation is on tangible assets whereas depletion is on non-renewable resources.
  2. Depreciation is the deduction of the asset value due to aging, whereas depletion is the actual physical reduction of the company’s natural resources (accounting for consumption).

Amortization

Prorating cost of an “Intangible Asset” over the period during which benefits of this asset are estimated to last is called Amortization. The concept of amortization is also used with leases & debt repayment.

Amortization is for Intangible assets whereas depreciation is for tangible fixed assets. Examples of intangible assets are copyrights, patents, software, goodwill, etc.

Method of Reduction Type of Asset Examples
Depreciation Fixed Assets Building, Machinery etc.
Amortization Intangible Assets Copyright, Patent etc.
Depletion Mineral Assets Mines, Oil fields etc.
Management Notes

Factors affecting depreciation

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  1. Normal Physical Wear and Tear:

Due to normal use of the assets, the assets deteriorate physically, which results in reduction in their value.

  1. Efflux of Time:

Certain intangible assets have fixed life span such as Trade Marks, Patents or Copyrights etc. The value of such assets decreases anyway with the passage of time irrespective of the fact business enterprise is using them or not.

  1. Obsolescence:

Research & Development leads to innovations, in the form of better and technically advanced machines that scrap old machines even though they may be capable of being run physically.

In that case there may be a permanent decrease in the market prices of certain assets like Computers, Motor Cars etc. This results in decline in the value of old machines. Obsolescence is a loss arising from outdating and replacing the existing asset with the new and improved model of that asset.

  1. Accidents:

Destruction or damage caused by an accident may result in reducing the value of assets.

Factors Affecting Depreciation:

As already stated, depreciation is not an attempt to record the changes in the market value of the asset but a systematic allocation of the total cost of depreciable asset (capital expenditure) to expenses (revenue expenditure) over the useful life of the asset because market value of some assets may increase in short run but even then the depreciation process continues. Based on the matching principle a reasonable portion of capital expenditure (i.e. the cost of the asset) should be charged to revenue during the useful life of an asset.

The calculation of amount of depreciation expense for an accounting period is affected by the:

(i) Actual cost of the asset

(ii) Estimated useful life of the asset

(iii) Estimated residual value of the asset.

It is worth mentioning here that out of three factors, two factors are based on just estimation and only one factor is based on actual. Thus, calculation of depreciation expense is just an estimated loss in value of assets and not the real and exact decrease in value of an asset.

Now we shall move on to discuss each of the above factors in detail:

  1. Actual Cost of the Asset:

Actual cost or historical cost means the acquisition cost of the asset and includes all incidental expenses which are necessary to bring the asset to its present condition and location. Examples of such expenses are installation charges, freight inwards or expenses incurred for improvements of such assets and which are of capital nature.

  1. Estimated Useful Life of the Asset:

Estimated useful life of the asset is either:

(i) The period over which a depreciable asset is expected to be used by the enterprise or

(ii) The number of production or similar units expected to be obtained from the use of the asset by the enterprise.

  1. Estimated Residual or Scrap Value of the Asset:

Residual or scrap value is the expected value which may be realized when the asset is sold or exchanged at the end of its estimated useful life. When residual value is significant, it should be taken into consideration for computing depreciation. However, an insignificant residual value can be ignored for computation of depreciation.

Depreciation is a continuous process, but we don’t record depreciation daily. Actually, the total amount of depreciation to be charged on any asset is an advance expenditure which has been paid by the enterprise at the time of acquisition of such asset.

In other words, this expenditure should be treated like deferred expenditure and only adjusting entries, for charging reasonable and appropriate amount of depreciation to revenue in the income statement, are required to be passed every year.

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