How Small Businesses Can Better Leverage HR

Most small business owners have a dream, an idea and a plan. Their goal is to be among those who find success not only after their first year, but for many years down the line. They’ll ask themselves if they have what it takes, and when they face challenges, they’ll wonder what they can do to improve their chances of survival in a competitive market. Something that can make all the difference is implementing smart human resource practices.

Large organizations have large HR departments, but at many small businesses, the owner is also the HR decision-maker, whether they recognize themselves in that additional role or not. This person typically is already handling several other jobs, because labor is the largest cost at most small businesses. They might recognize that they are in charge of hiring a new employee, determining their pay and training them in their role, but they likely don’t think about the difference these tasks can make in the performance of their entire organization.

Small enterprises account for the majority of all businesses worldwide, according to the World Bank. Even with this huge global presence, small businesses face many challenges. They must compete with large companies that have more resources as well as with each other. According to the U.S. Chamber of Commerce, 18 percent of small businesses fail within their first year, and that number grows to 50 percent and 65 percent after 5 and 10 years, respectively.

Implementing proven human resources practices is critical to small business growth and could even be the deciding factor between success and failure. About half of all small businesses handle HR matters in house. From a financial standpoint, this makes sense. However, an ADP study found more than 80 percent of these HR decision-makers don’t have HR training, education, or experience or aren’t confident in their HR skills, SHRM reported. Add to this recent Bank of America research that found over half of small businesses report labor shortages—with 21 percent losing customers as a result—and it’s clear that implementing an effective HR strategy can help fill this gap.

Training and Development

Few people dispute that training and development efforts have a strong and positive correlation to company results by increasing job satisfaction and performance. “A 10 percent increase in training produced a 3 percent increase in productivity over two years,” said Iva Klepic, who oversees HR and is an assistant professor at the University of Mostar in Bosnia and Herzegovina.  

Klepic explained that there is a difference between training, which is providing employees with the knowledge and skills to do their jobs, and development, which is focused on personal and career growth as well as preparing employees for future roles. Additional research found that training and resources impact both an employee’s ability to do their job and their willingness to be proactive, because proactive employees continue to look for new ways to develop. Employees also are motivated by their company’s culture, their potential for career growth and their work/life balance.

The Decision to Implement

At many small businesses, HR is a minor portion of the responsibilities of the person who oversees it. Therefore, creating a more elaborate HR strategy not only takes time, but also can disrupt what many find attractive about working at a small business: the informality. However, better HR practices will benefit the organization.

One case study showed that among a sample of small business leaders, there was a significant lack of understanding of HR practices and their outcomes. This pool of HR decision-makers largely mentioned training and development, which can influence company growth if done effectively. However, “human resource management was seen merely as a source for exploitation rather than exploration,” Klepic said. The links between effective HR strategy components and their outcomes can be quite complex.

While implementing HR practices typically adds a layer of structure at small companies, it doesn’t have to take away the unique appeal of a flexible organization, research found. There is concern that a more formal HR strategy may cause employees’ motivation to decline because they enjoy autonomy, but HR practices can actually strengthen employee retention as workers gain more influence over their role and tasks and increase their company loyalty, which decreases turnover.

Leverage Wise HR Practices

How can small businesses utilize HR not only as an effective tool in growth but also as a competitive edge over larger corporations? By realizing that unique, talented and committed employees are harder to imitate than financial or technological resources.

We know that these employees are motivated in different ways, but many are motivated by a hybrid work schedule. Benefits like this can make a huge difference in hiring and retaining human capital. The company’s recruitment selection will be wider, and small businesses can save costs on office space and utilities.

Over the past year, 30 percent of small businesses adjusted their models to allow for hybrid or remote work in order to stay competitive and retain their employees, Bank of America reported. Other benefits include additional paid time off, increased training and development, and compensation adjustments that account for inflation.

HR technology is also evolving to the benefit of small businesses and their leaders. Organizations can utilize smart surveys to measure employees’ attitudes and stay in touch with their motivations, needs and feedback. They also can offer memberships to wellness apps as an additional benefit to combat workplace stress, as well as streamline and enhance employee recognition programs.

When do small business CEOs outgrow the combined role of business leader and HR decision-maker? Delegating HR responsibilities typically happens when the 10th employee is hired or when certain employment laws and regulations kick in. However, business pace and factors such as turnover also play a role in this decision. Another rule of thumb is that small businesses should hire a full-time HR professional when they reach 80 to 100 employees, although some businesses benefit from having a dedicated HR pro with fewer employees.

Katie Bevilacqua is an HR professional in the finance industry and a graduate student at the University of Denver.