Although Small & Medium Enterprises are set on a growth trajectory, they are still grappling with inherent challenges of culture and scale, which the HR leaders must address.

The Indian economy is now the second fastest growing economy of the world. As per the Ministry of Finance, the GDP of India stood at 8.8% in the first quarter of 2010-11 (the overall growth of GDP in 2009-10 was 7.2%); overall growth in the Index of Industrial Production (IIP) was recorded at 13.8% during July 2010 as opposed to 7.2% in July 2009. In such a visible growth environment, tremendous efforts are being made by SMEs (Small and Medium Enterprises) to make their prominent presence felt and to convert their growth plans into reality. In last two decades, there have been certain spaces where many SMEs have not grown either by choice or by challenges in capabilities to transform their business. SMEs compete with big players either as B2B or as B2C business models. Where on one hand big players enjoy economies of scale to control prices, SMEs enjoy agility in bringing the product faster to the market on the other. Assuming that other factors such as strategy, funds and right personnel are comparable, we still find many SMEs struggling to achieve expected growth. While entrepreneurs are willing to explore ways to minimize this inertia, HR and its different facets also play an important role to address the growth issues SMEs face.

Culture in SMEs

The trade-offs, which every SME faces day in and day out are worth exploring. Trade-offs can be articulated as growth with centralization or de-centralization, or growth with partnerships or without partnerships. Cognitive and Emotional trade-offs include decisions like whether to have more of owner’s family or more of professional employees on the Board; whether to have more powers given to professional employees or to keep the powers with owner’s nominees, et al. The basic values that SMEs reflect are trust, cost consciousness, agility, high level of risk taking ability, centralized decision making, culture of driving business by intuition and relationships rather than facts and professionalism.
More often than not, the values of the Promoter or owner are the expected values or culture of the organization. And this perhaps is one of the most important aspects restricting the growth of SMEs as there is a dire need for change in the organization culture to match the challenges of business. For example, with growth in scale of the organization, there is a substantial increase in decision making also. And if change in the process of decision making is not addressed, the organization will be in a grid lock. Although this is true for any organization, SMEs with high growth rate are hugely impacted if this change is not addressed. Another cultural impediment faced by SMEs is that the existing employees who are well adjusted to the conventional culture generally develop differences with the employees who are recruited from professionally driven big companies.

Challenges for HR Function

When the enterprise is Promoter driven, the stakes of HR are very high because it has a two-fold role – firstly, to continuously influence the Promoter on the need for organization culture change and secondly, to manage the agenda for organization culture change. Often, the values which the Promoter reflects are different from the values that the employee groups reflect. The condition becomes critical when the values of Promoters, employees and those which are essential for business growth are all different. In such a scenario, it is important to create awareness amongst decision makers about the need for change. SMEs are mostly interested in hiring good talent from big giants and many senior professionals take this lead since the roles in SMEs are extensive and more motivating. On the flip side, the success of such senior professionals depends on how much they are willing to unlearn to fit culturally. The culture dimension is shifting from a ‘professional driven’ company to a company which is in pursuit of becoming ‘professionally driven’. HR has the challenge of attracting talent on role dimension and then retaining that talent by providing a professionally driven organization culture. Apart from roles, attraction and retention is also clearly linked to the ability of SMEs to offer competitive benefits package. However, since benefit costs decline (as firms become equipped to aggregate risk across a larger number of employees), SMEs are at a disadvantage in their ability to offer competitive packages.
Due to low degree of bureaucracy and leaner work force structure, it is easier for HR to implement change management programs in SMEs. Moreover, the response to such initiatives is also well received. Another factor for HR to realize is that not all HR processes have equal importance in SMEs and there are certain exceptions to be dealt with. For example, the process of promotion in SMEs has a lot of say from the Promoters. Many times the promotions may not be yearly but as and when needed. Such frequency has its own advantages in making organization agile and responsive. Similar dimensions are observed in the recruitment process, which is generally based on referrals. The most important dimensions which are looked, apart from functional competencies, are loyalty and trust. Since most SMEs take high amount of risk, it is therefore imperative for them to address the certainty through reliable and loyal work force which can shoulder them in good and bad times.
Another challenge which the HR faces is adhering to the agreed policy norms which succumb to exemption from the owners. HR also needs to understand that the owners do not want to feel themselves devoid of decision making power due to change in policies. Such instances may be appropriate from the business point of view but may look inappropriate from the HR point of view. HR professionals need to be conscious that professionalism without the loss of agility and responsiveness is the right transformation direction for such companies.

Line Managers Assuming Responsibilities of HR

SMEs face unique challenges that stem largely from their size. While economies of scale permit larger organizations to employ a team of specialists to address the complexities involved in managing HR programs, this is not a viable option for many SMEs. The costs associated with hiring highly trained HR professionals on a full-time basis are likely to be prohibitive for many smaller organizations. As a result, HR activities often become the responsibility of line managers. This can be problematic for two reasons. First, the complexity of many HR activities is likely to result in them becoming a significant drain on managerial time and resources. As such, HR tasks may interfere with managerial responsibilities that are directly related to revenue production. This problem is even more critical given that scarcity of managerial talent is often cited as a key factor limiting growth in SMEs. This scarcity of managerial talent increases the opportunity costs associated with time spent on HR administration by SME line managers. Second, many HR tasks involve substantial complexity and thus the quality of HR decisions may well be affected by the fact that line managers often lack significant training and expertise in HR.
To summarize, HR functions deal with different dynamics when contributing to SME growth plan. While the organization plans to follow a successful trajectory, there is a need for both HR and the Promoters to appreciate and agree on change management agenda through change in organization culture. HR has the responsibility to understand business dynamics in SME environment before implementing the standard HR practices, policies and processes. This mutual appreciation will help HR to be an effective business partner.

(The views expressed are personal and do not represent the views of Dr. Reddy’s)

Rajiv Oza is Director HR, Dr. Reddy’s Laboratories