What does the future of HR look like in an SME?
The term ‘SME’ is broad, including a wide range of organisations from a one-man band to a company of 250 staff which may look similar to a large organisation in terms of structure and process. And so the people management approaches adopted across this diversity of organisations will look very different.
To consider what the future of HR may look like in SMEs, I’ll first look at the current HR models and approaches being adopted in smaller organisations. I’ll then go on to consider what the insights from my in-depth case study research with a wide range of SMEs could mean for the future, in particular what operating models could look like ten years from now, whether the capability requirements of HR will change, and whether there are implications for HR career models.
How do SMEs currently organise and develop their people function?
In thinking about what HR may look like in SMEs in the future, let’s first do a stock-take of the choices SMEs are currently making about how to best manage their people. The overarching questions to consider are: whether and at what stage does an SME typically need an HR professional? Or perhaps someone responsible for the people agenda, whether they have ‘HR’ in their job title or not? And what are the most important people management areas to focus on?
My case study research demonstrates that the needs of an SME will also change over time. Decisions depend on a range of factors, including workforce size, sector, growth ambitions, industry and the owner/founder’s views on the importance of investing in their people.
My research with smaller organisations has revealed a wide range of different ‘HR’ approaches, from focusing only on contracts, pay and admin, to a more holistic HR approach addressing the employee lifecycle and thinking about what’s really going to make a difference to the long-term health of the organisation: employee engagement, talent development and career paths.
Some case study organisations chose to hire a professionally qualified HR manager at an early stage of business growth to ensure they have the right people in place to meet their growth ambitions. At the other end of the spectrum, some companies have chosen not to employ an HR professional, despite employing over 100 staff. This doesn’t mean they don’t take people management seriously – far from it. Many have adopted alternative approaches, for example leaders and managers take on HR responsibilities that may not be expected in other organisations. Or an office manager may operationalise great people management and development with the support of an HR consultant.
As Harney and Dundon (2006) (1) articulate: ‘the extent of formalisation of HRM should not be seen to be indicative of the substance of HRM.’ It’s clear that SMEs are not simply a scaled-down version of a larger organisation. They are unique in their culture and whatever people-related decisions are made need to suit their particular organisation context.
A small business’s people requirements will change over time as the company grows and matures. It follows that who champions and delivers on the people agenda will also change as the business demands change.
A four-stage model of SME growth
Through my case study research with a wide range of SMEs, across sectors and sizes, I have proposed a four-stage framework of SME growth or maturity. Each stage is associated with particular people management approaches, including the HR operating model typically adopted.
Between each stage is what I’ve referred to as an inflection or a tipping point. These are typical points reached by SMEs where the current people approach is no longer suitable or effective for the business. The needs of the business and hence its people management needs are changing – it’s through looking ahead to these transition points and taking action to adapt or introduce new people-related activities that the business will be sustainable.
Not having the right approaches in place can stunt growth, lead to turnover, failure to fulfil customer orders, and ultimately require extra effort to reconnect with staff who’ve become disengaged. And in organisations where no one takes responsibility for the people agenda, these issues will be clearly apparent.
How does an SME’s HR requirements change through SME growth?
As a company moves through the stages, the people challenges change, with implications for the nature and demands on the people role. As we’ll see, it is likely that as the company grows, so does the need for more specialist people management capabilities. There are also more opportunities to support the longer-term health of the organisation. For example, a larger workforce makes it possible to offer development and career progression.
In the start-up entrepreneurial phase of an SME, people issues tend to be dealt with (or not!) by the owner/founder, with no formal HR role. Overall the business tends to be characterised by informality, with an emergent strategy, fluid structures, flexible job roles and tacit knowledge exchange.
In terms of its people, the focus is on hiring the right key people with the right skills to run a certain section of the business. The owner/ founder takes responsibility for hiring, looking for someone who ‘fits’ with what their company is all about and is inspired by what they’re aiming to achieve. The people-related requirements tend to be minimal, centred on pay and contracts, with the rate for the job set by the owner. Employees tend to be self-motivated by the business’s aims and learn through doing, needing to get involved in all sorts of activities beyond their core job role to make the company a success. The owner’s vision and their personal values guide both the ‘what we do’ and ‘how we do it’.
If there are more serious issues, for example a tribunal claim, a solicitor tends to be the first point of call, or conversations with the bank or accountant for advice on where to go for help. There may be a similar reaction when ‘the firsts’ happen, such as the first pregnant member of staff on the books. Most other events are dealt with ad hoc, including bereavement leave, someone handing in their notice or clashes between members of staff.
If the business transitions into the emerging enterprise stage (through increasing workforce numbers or needing a more formal approach), more people issues come to the fore. In many of our case studies this stage was associated with larger-scale hiring than previously and more operational staff. People and performance issues become more salient and some structure and procedures need to be introduced to guide work, define job roles and create a sense of fairness across the organisation.
Within the emerging enterprise stage a key transition point for the business is when the owner/ founder needs to delegate some responsibility for the running of the business to other leaders and managers. Teams emerge and day-to-day people responsibility is largely devolved to line managers or team leaders, often promoted on their technical capability with little or no management training.
On the whole, in the emerging enterprise stage HR tends to be transactional and reactional. Payroll is usually the charge of the finance manager and in many cases the office manager takes on some workforce-related activities, such as establishing absence records and holiday scheduling, and addressing people issues as they emerge. This role has the tendency to grow into a more formal HR role in the next stage.
In some organisations an HR manager is hired (full- or part-time) with the remit of putting in place the necessary procedures and policies. In others an HR consultant was engaged in this stage with a remit to address particular people issues, put in place the structure and process needed, or in a more ongoing general advisory capacity.
The decision to hire HR or someone to take on this role formally is determined by the business leader or founder’s views on people management and development. There is a marked difference in business approaches at this stage in terms of whether the owner just wants to have the necessary policies in place to ‘keep them out of court’, to the other end of the spectrum where they see their people as fundamental to their success, believing strongly in the link between happy employees, happy customers and a positive balance sheet.
My research has found there are a variety of impetuses for deciding to hire/develop the business’s first HR professional:
- The business has reached a size where policies and procedures are needed to guide work and create a sense of fairness.
- The owner/founder feels that people issues are taking up too much of their time.
- People management is seen as vital for growth and to achieve the company’s vision.
- There is a specific people issue that needs to be addressed, for example tribunal cases, skills shortages, high turnover.
It’s important that an HR professional understands the leader’s motivations for hiring them and also thinks about how they themselves position their role – how can they influence people across the business through demonstrating their credibility and value-adding role?
The consolidation phase is characterised by reflection and improvement and typically taking a step back, ensuring that people practices support the longer-term ambitions of the business.
Whereas in the earlier stages the focus was predominantly on responding to immediate operational issues, now just putting a process in place to solve an issue isn’t enough. With each issue there’s a golden opportunity to also build on the organisation’s cultural foundations. There is a huge risk by this point of growth that what the business is all about, its founding principles and values, can become diluted and even disappear. HR is ideally placed to keep these core business principles alive by ensuring the values and purpose are threaded through the people practices.
A more planful approach to resourcing is needed, looking at long-term skills requirements, as well as a more formal approach to management and leadership development. Consideration needs to be given to who assumes the learning and development role to address these skills and training issues. Furthermore, the size of the organisation at this stage typically makes establishing career paths possible for the first time. Some case studies talked about this stage being associated with people looking outside of their organisation at their friends’ careers and wanting the same opportunities.
In the same vein, many of the organisations I’ve worked with have introduced a more sophisticated reward offering at this stage. Performance-related pay or profit sharing are common mechanisms used to promote staff engagement with organisation goals.
HR tends to be in-house by this stage. Most of our case studies had either hired an HR manager into the business (some organisations had offered the HR consultant they worked with in their start-up stages a full-time position) or were supporting the development of an existing employee (typically an office manager) to formalise their HR role through study.
Interviewees in my research flagged the pros and cons of both options. Developing someone whose background is not in HR means they need to get up to speed quickly as a generalist, but they already have a sound appreciation of the business, people’s roles and growth ambitions. When hiring an HR manager externally, business leaders talked about the need to make sure they understand the business and what it’s all about and that introducing policies from a corporate background weren’t necessarily going to work ‘round here’.
With prior focus tending to be on recruitment and establishing policies, a different HR skill set is needed now. Whether the current HR professional is a generalist or a recruitment specialist, their attention needs to be focused on talent development, engagement and a more sophisticated reward proposition. And as the focus of the business tends to now be shifting to a longer-term view, the HR approach needs to do the same. In some of our case studies there was an HR assistant responding to the day-to-day requirements of HR, as well as an HR manager balancing the short- and long-term demands.
In this final stage of the framework the SME is looking more like a larger organisation. A strategic approach to people is needed as the business’s focus is on sustainability, combining expertise around the internal context (culture, engagement and internal collaboration) and scanning of the external context of wider industry and labour market trends.
The HR function also typically looks more like a department, with a generalist HR manager or director and specialist HR professionals leading on recruitment and learning and development.
Overall, the critical transition point for our case studies moving from a transactional to a strategic people approach occurred between the emerging enterprise and consolidating organisation stages. Attaching workforce numbers to the stages didn’t reveal any particular pattern, with SMEs growing and transitioning at different workforce sizes, depending on their strategy, the leader’s view on people management and the industry the business operates in.
So what does the future of HR look like in an SME?
Small business success depends on its people, their drive and their contribution. Someone needs to take responsibility for leading the people approach, making sure the right people are hired, and they are developed and managed in the most appropriate way.
This responsibility has traditionally been thought of as the ‘HR’ role, but my research has shown that the people agenda can take many different guises, and the demands of the role change through business growth and maturity. Some aspects of people management are more critical at different stages of business development. This leads me to propose that we think more broadly in terms of a ‘people’ role for an SME.
Many entrepreneurial small companies already have this broader mindset, which is in stark contrast to the more traditional large organisation mindset and HR operating model. Adopting a broader view presents a range of possibilities for what the future of HR looks like in an SME. I consider some of what we need to look at in terms of its form and function, and also how we think about HR careers.
Will the key capabilities needed by HR in SMEs change?
Working in an SME is clearly a different experience from working in a large organisation. There is a spotlight on certain capabilities HR needs to develop to have maximum impact on business performance. The importance of these is unlikely to change, and I believe we need to be calling these out to both attract the right people into the role and to steer personal development.
Being comfortable with role agility
A considerable amount of agility is required and a passion for personal development. You need to have generalist knowledge, being able to manage the spectrum of people management and development issues. But this needs to be overlaid with a degree of specialist knowledge in key areas which can be tuned up or tuned down as the business requires. Business acumen and the ability to think ahead are needed to ensure that this tuning up or down of specialist skills happens at the right time.
Also, the reality of working in an SME is that the scope of any job role expands beyond the one you are contracted to do. Despite the increased workload, most people saw this as a positive thing as their role extended into other areas of the business, increasing their business savvy. There is also huge opportunity to get involved in all aspects of the business, the speed at which decisions are made and change can happen, and the ability to quickly see the impact of what you do.
Adopting a fluid HR approach
It is clear from the case study learning that people policies and practices can’t be seen as set in stone. They need to be fluid, changing as business and workforce needs change. What works for a team of 30 people won’t necessarily work for a team of 100, where there is likely to be more people diversity.
A fluid approach helps to feed innovation, with this mindset making it easier to trial different people approaches, either shaping and improving on beta versions or removing what doesn’t work. But it also requires an HR professional to be comfortable with change, uncertainty and operating in largely unknown territory.
Assuming a coaching role
More attention needs to be given to ensuring the quality of ‘operational HR’ – the translation of policy into practice at an operational level. This means more investment in up-skilling managers to effectively manage people. HR needs to take a leadership and oversight role on the people agenda, being able to coach line managers to manage their teams most effectively.
Operationalising HR policies requires an understanding of the particular business context, making sure that the people practices are enacted in a way consistent with its culture and values. A close relationship with the rest of the business enables practices to be co-developed, tested and refined.
Developing and demonstrating business acumen
Operating in an HR role perceived as a bolt-on to the business is not going to be nearly as impactful as being able to influence business decision-making. However, the reality is that sometimes the expectation of HR is to keep the business owner out of court. Here HR has to work really hard to demonstrate credibility in a wider business role. Being able to articulate a clear business need and demonstrate the impact of people initiatives are vital skills for persuading the rest of the business of the potential impact that a more strategic approach to people management can have on productivity and profit.
In the words of one interviewee in my research: ‘To be an effective HR manager in an SME you need to be perceived as a business person who happens to know an awful lot about excellent people management.’ This requires business acumen, a long-term mindset, external as well as internal focus to be able to spot trends that will affect the business in the future, and being able to communicate effectively with different stakeholders.
What are the implications for HR career models?
The capability requirements we’ve discussed lead us to think differently about HR careers and routes into the profession. As a business transitions through the growth/maturity stages I’ve outlined, more people-related challenges emerge and a more sophisticated people approach is required. This does require specialist people-related insight, knowledge and skill. So how do we attract and develop the people who are going to be most effective in these roles?
Typically in an SME someone within another function takes on the people role which develops over time. These people tend to assume a dual role, perhaps later making the move to a solely HR role. This career route means they bring with them operational understanding and business acumen, and combine it with people knowledge and insight.
In traditional HR career models, rotations in and out of HR are rare, with a study by Lawler and Boudreau (2015) (2) finding that less than 2% of the companies they surveyed reported great use of this practice. Is this combination-style career model, and the general closeness between all parts of the business, a privilege of SMEs or a model that has useful elements for larger organisations, particularly around career rotations?
We also need to think about how agility can be built into HR roles – a key facet of SME working. CIPD survey research of HR professionals about their careers revealed that generalists tend to stay generalists and specialists stay specialists. But in an SME HR professionals need a combination of the two, having generalist skills and wide-reaching basic knowledge, but being able to tune up or down particular specialisms when required. Demands on their knowledge and hence agility are wide-reaching.
What might SME HR operating models of the future look like?
The typical transitions the HR function goes through are from having an HR consultant initially, to hiring or developing an in-house HR professional, to gradually growing the in-house HR team. But given the capability requirements discussed above of needing to flex generalist and specialist skills as the needs of the business and the workforce change, is this the only model to follow?
We are seeing more and more networked and virtual organisations developing, particularly in the small, entrepreneurial business space. I wonder if this model will increasingly spill over into the traditional HR one? For example, could SMEs have a core, generalist HR professional in-house and share specialists across an SME cluster? Will regional or professional ‘centres of excellence’ develop which SMEs can dip in and out of?
Given the emphasis SMEs put on ensuring the cultural and values fit of their people practices (and rightly so), having an in-house person to oversee this is essential. And someone who has the generalist knowledge to be able to select and guide the right specialists makes sense. But ultimately one person cannot be expected to be an expert in every area of HR.
Another question around future HR operating models in SMEs is whether we will see a division of administrative and strategic HR. HR professionals in SMEs often talk of the difficulty in splitting their time and resources between the more administrative tasks and the longer-term approaches they need to put in place for the sustainable health of the business. Many were grappling with how to better balance or even split this tension.
Some small businesses that were keen to embed people management and development into the very core of how they operate adopted what could be termed integrated HR. A distinct split of transactional and strategic HR duties was facilitated through more devolution to line managers and greater employee empowerment over their own development and the way they manage their work.
Another feature of this integrated-style model was characteristic of the mantra, ‘If it doesn’t exist or doesn’t work, build it!’ HR embarked on collaborative innovation with other parts of the business, co-developing systems and practices that worked for them.
For a more in-depth discussion of the issues discussed here and case study examples of some of these increasingly emerging new forms of organising and the capabilities required of HR in SMEs, take a look at our SME hub page.
1. HARNEY, B. and DUNDON, T. (2006) Capturing complexity: developing an integrated approach to analysing HRM in SMEs. Human Resource Management Journal. Vol 16, No 1. pp48–73.
2. LAWLER, E.E. and BOUDREAU, J.W. (2015) Global trends in human resource management: a twenty-year analysis. Stanford, CA: Stanford University Press.
About the author
Jill Miller joined the Chartered Institute of Personnel and Development in 2008. As a research adviser, her role is a combination of rigorous research, active engagement with academics and practitioners to inform projects and shape thinking, and active dissemination of research findings and thought leadership. She frequently presents on key people management issues, leads discussions and workshops, and is invited to write for trade press as well as offer comment to national journalists, on radio and TV.
Jill’s current research initiatives focus on the role of people management in driving SME growth. She has conducted research with both UK and Singapore SMEs to propose a framework of how people management practices and approaches need to change as SMEs grow and transition. Her most recent work takes an in-depth look at how SMEs can keep their culture and values at the heart of the business and how SMEs can best recruit and develop talented people.