HR and the SME growth cycle

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HR magazine looks at how important HR is to the burgeoning small and medium-sized enterprise sector and finds that, once the initial cynicism about bureaucracy is overcome, the function can evolve with the company

When 14.4 million people in the UK went to work this morning, they did not commute to a Tesco, Unilever or Shell office. Instead they hung their coats up at – or logged in remotely to – one of the country’s 4.9 million small and medium-sized enterprises (SMEs), where they spent the day doing more than their fair share to kickstart Britain’s struggling economy.

Accounting for about 60% of private sector employment and 48% of private sector turnover in the UK, SMEs make up an impressive 99.9% of private sector businesses, according to 2013 estimates from the Department for Business, Innovation and Skills. In other OECD economies, SMEs account for more than 95% of enterprises and 60-70% of employment. No wonder they are variously referred to as “engines of growth” (thanks, David Cameron) and the “lifeblood of the UK economy” (Vince Cable).

But while these small businesses are driving the economy, who are driving them? “SMEs typically have limited materials and financial resources – their people are their business,” says Jill Miller, research adviser at the CIPD and author of the report Achieving sustainable organisation though HR in SMEs. “Effective people management at all stages of organisational transition is fundamental to achieving sustainable organisation performance.”

HR as a blocker

The extent to which SMEs understand that, however, varies. “There’s no clear-cut answer to what small organisations are doing,” says Miller. However, for those in the micro and small business category – organisations with up to 50 people, according to European Commission definitions – the simple answer is HR issues are seen as mired in red tape, says John Kilbey, business consultant at the Forum of Private Business (FPB).

“I’m afraid HR is viewed as a blocker,” he says. “In terms of enabling the business to run smoother, it’s seen as a compliance issue. HR is about ticking boxes. For a smaller business, it’s a huge commitment of time and effort, even an imposition.”

Although the FPB acts as adviser on all things business, 90% of its calls are HR-related. Such calls tend to be reactive, although Kilbey tries to instil the priority to think ahead. “I always say, we can help you avoid falling in a hole, but if you’ve jumped in it’s harder to get you out,” he says. “In a small business, an issue will arise and they will want to attend to it there and then so they can get back to making widgets or whatever.”

Theresa Marks, an HR consultant specialising in small businesses, says most of the work she is asked to do is on the reactive side. “In my experience, the owner/managers haven’t had the management training you get in a larger business,” she says. “They’ve been very focused on sales and profit and don’t focus on people issues until it’s urgent. Then they realise they need an HR person to deal with it and that they perhaps should have been more proactive. A lot of small businesses are shy of HR.”

However, overcoming that shyness can be a huge benefit, according to Alexander Jackman, the FPB’s head of policy. “Whereas a large company may strive for consistency, many small and micro employers strive for excellence and need their staff to go that extra mile,” he says. “Otherwise, they fail to differentiate themselves from larger companies who can use economies of scale to deliver similar products at a lower cost.”

Sara McTrusty, HR manager at North East England cleaning company MJF Cleaning, which has about 120 employees, understands that all too well. “If we have staff who aren’t performing, the impact is much bigger [than in a larger organisation],” she says. “Poor performance isn’t absorbed by our high performers. There’s an immediate impact.” In a small business, how one person, at any level, behaves can make all the difference.

Four stages of growth

In Miller’s research, there are four stages of SME transition, each associated with different people management practices and the person who delivers it. Although they are often related to size, they can also be linked to organisational maturity. They are: entrepreneurial edge, emerging enterprise, consolidating organisation and established organisation.

“In the entrepreneurial stage, the founders are going to do the people management stuff themselves, but the organisation will get to a stage where you can’t manage informally any more,” she explains. “The operational side of the workforce grows – that’s when you need process and procedures.”

Communications service provider Daisy Group started life in the CEO’s garage in 2002. Twelve years later, it has about 1,500 employees. Finance director Steve Smith says: “The HR team has had to evolve with the business. We never sat down with a blank piece of paper and set out what we wanted HR to look like. But going from having one HR administrator to a team of 12, along with six L&D people and a head of HR – HR has evolved a lot, as have the processes and policies. You can’t rely on the person sitting next to you knowing how things operate. You need some process.”

After the process comes the structure. “In the early days, everyone is expected to muck in,” Miller explains. “If a lorry comes in and there’s no one there to unload it, the guys in the office need to do it to keep the business moving. But when people are all trying to muck in as much as possible, they might be duplicating roles. There needs to be structure around job roles and descriptions.”

It’s a sentiment echoed by Julia Edmonds, MD of catering company Lexington, which has 650 employees yet only recently hired an internal HR resource. “When we were small, we were all hands-on doing everything,” she recalls. “When there were only six of us in the office, we all got involved with everything. But as you grow, you need those structures in place.”

Although Lexington had grown considerably before formalising the HR function with a dedicated people manager, Miller says the “consolidating stage”, where the organisation “takes a breath, steps back and looks at what it has in place and works out what it needs to support future growth”, is often a signal to “professionalise the people function”.

“One obvious trigger could be being taken to tribunal,” she adds. “Those demanding times make people think: do we need to take things seriously and think ahead a bit more?” Smith agrees: “In the early days, the HR administrator sat in a room and waited for people to come in with their problems. Now, we need to predict problems before they occur.”

From transactional to strategic

The final growth stage, according to Miller’s research, is about focusing on the long-term health of the organisation. “When there are so many teams, the organisation needs to look at engagement for the long-term, collaboration, internal knowledge-sharing and rewards that promote growth rather than individual interests.” In other words, strategic HR.

Although Daisy Group is no longer an SME, its growth story remains relevant. “HR used to be an administrative function,” Smith recalls. “Now, it’s a lot more strategic. We used to have to recruit senior people externally because we didn’t have them ready; now we want to grow them internally. Where we used to think about recruitment, now we think about retention.”

McTrusty joined MJF Cleaning in late 2012 with a clear mission: to support the MD’s ambitious growth plans. “The company was having more and more people-related issues and had plans to double in size,” she says. “They wanted to get the basics right.” So for McTrusty, it’s a combination of getting the basics in place and creating a people strategy to develop a workforce that is “dedicated, best performing and who will want to stay and grow with us”.

Do SMEs need HRDs?

Of the small businesses the FPB advises, which sit towards the micro end of the scale, 24% have an in-house specialist, but Jackman says this is often the office manager or finance director rather than a dedicated HR professional. Martin Edwards, CEO of the Dorset children’s hospice Julia’s House (130 employees), initially employed a joint HR and finance manager, but says the organisation “quickly grew to the point where we needed to separate those roles. When we separated them, we become a lot more expert at both. It saves you a lot of time and error in the long run.”

Indeed, for HR to move from the administrative to the strategic and allow more proactive, people-related thinking, having an internal resource becomes more of a necessity, whatever the company size. But the company must identify what value it feels HR can bring, says Miller. “If a small, entrepreneurial company hires an HR person to just put in the policies and the ‘keep me out of court’ stuff, that’s not showing the true value of HR and what it can bring to the business.”

In terms of recruiting a senior HR resource, such as a dedicated HR director, Miller stresses the importance of it being a strategic, long-term decision. “What do you actually want them to do?” she asks. “Is putting in the process the best use of their time?”

Gill Crowther, HR director at internet domain provider Nominet, adds that it can be “quite scary” for an HRD to join a successful SME. “What value can you add to somewhere fabulous?” she points out. “The leader needs to know what they want the HRD to get involved in – such as making it a high-performance culture or a great place to work. Give the HRD goals so they know what they’re doing.”

Like Miller, she argues that hiring a strategic HR director to do process is missing the point. “A lot of SMEs reach 100 staff and get an HR person to cover their backsides. Good companies see the power of having a vision that includes people, and grasp that’s where having a good HR director can help. Of course you need processes in place, but I would encourage SMEs to think about people earlier rather than later because, once it’s gone wrong and you’ve got 150 disengaged people, it’s hard to put right.”

Maintaining the culture

For many smaller businesses it’s undeniable that the perception of HR is associated with bureaucracy, not transformative strategy. Formalising the function with a director role can meet resistance. Construction company Esh Group has enjoyed significant growth since its formation 1999 and has about 1,000 staff, spread among 13 smaller companies. The group introduced an HR function in 2004 and HR director Chris Watson joined two years ago, in the middle of the downturn. “When I joined, it was about holding our own, going back to basics and retaining as many people as possible,” she recalls.

But the appointment of an HR director was met with some resistance at first. Watson says: “Some of the smaller companies thought we would want forms for everything and that HR makes things long and difficult. But we want them to see how the process sets them up on the right path: they don’t want to have the heartache of going through grievances or tribunals. Once you have the right approach, those issues virtually disappear.”

As well as showing that good HR can save considerable time and effort, Watson says she made a real effort “to win hearts and minds; not change thing overnight”. “We weren’t going in like bulldozers, it was to fully engage so they understood the reasoning. They have accepted it and it does work.” Group added value manager Darush Dodds adds: “HR is a big part of where we want to go. We are working a lot harder now at things like succession planning and taking care of the future.”

As Esh grows, retaining the culture where, as Dodds puts it, “we succeed together and we fail together” is critical. “We really want to retain that family feel and make sure we know our people,” says Watson. But maintaining that ‘small company feel’ through growth is a challenge. At Julia’s House, Edwards is fanatical about maintaining what he calls “an emotionally literate culture”. “The challenge is retaining the quality and intimacy of what we do,” he says. “There’s a temptation to press the command and control button, but you lose an awful lot of the supportiveness if you do that.”

This is where he sees an HR director as adding most value. “HR is about more than just getting the processes right and ensuring you don’t break the law,” he says. “It’s about ensuring you have an emotionally literate culture right across the organisation. And it’s not about being nice; it includes promptly and robustly challenging people who don’t meet those standards.”

That’s why hiring an HR director who is the right cultural fit is so vital, says Miller. “The crucial message is: does that person identify with the business and tailor their approach,” she says. “HR needs to work out which style and approach both supports the business need and what the organisation is all about.”

She adds: “A key message coming from SMEs is to keep it simple. Too much bureaucracy is going to stifle them and stop them being able to react flexibly to new opportunities. [HR needs to think]: is this useful here and is it useful now? If it is, you’re on the right lines.” Now, surely that’s a maxim for large companies to live by as well as these smaller engines of growth?

Illustration by Cameron Law

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