A common question from business owners and entrepreneurs is “Do I need an HR professional?” The short answer to this question is “yes.” However, there are many nuances and factors to be considered. In general, if an organization employs people, there is value in a knowledgeable human resources professional. What requires deeper analysis is how you add this HR knowledge to your organization.
Does my organization need a Human Resources Department?
Answering this question requires us to define the scope of Human Resources. In some organizations, Human Resources is exclusively focused on the strategic and tactical components of employing people. Functions like employee relations, benefits, and talent acquisition are almost universally HR functions. Payroll can be an HR function or it can be an accounting function. Workers’ Compensation and safety can be an HR function or it can be a risk management function. Training can be an HR function or it can be an operational function. The more functions that are defined as “HR functions” the more likely you are to realize the value of an HR Department.
BUT…just because you may realize the value of a Human Resources Department does not mean you need to build a department. As we work with companies from a variety of industries and sizes, we have seen the mistakes made in adding Human Resources to the organizational structure:
- Hiring without expertise: Most business leaders and entrepreneurs do not rank HR as one of their core competencies. Yet, when it comes time to add HR to the organizational structure, they don’t seek expertise to guide the process. There is a difference in skill and competency between an HR professional who has worked in a niche of HR at a large corporation and an HR professional who has worked in growing organizations where there was no specialization. The HR certification behind the name can feel reassuring, but do you know if the applicant took the certification exam once or failed it 5 times before passing? Will your HR candidate provide tactical leadership or does (s)he have the capability to guide the strategic part of your organization? These, and many other factors, should be weighed, thus the value of including a strong HR professional in your interviewing and selection process.
- Hiring too much experience: No doubt that knowledge and experience are valuable. However, a unique aspect of human resources is that the vast majority of daily HR work can be fulfilled by experienced, mid-level HR professionals. Small to mid-sized organizations do not need 6-figure HR leaders to administer benefits, provide effective guidance on employee relations matters, or effectively recruit and hire people to the organization. In fact, smaller organizations may do better with a really strong administrative professional and a retained HR Consultant to provide strategic leadership and guide organizational decisions on important or impactful HR matters.
- HR Professional missing from decision-making: People are a critical asset in any organization. Yet, when it comes to key organizational decisions, HR, too often, is excluded from those conversations and deliberations. Recently, we had a discussion with an organization that, at the wishes of the accounting and payroll teams, changed their payroll provider. Since payroll is not part of HR, human resources personnel were largely uninvolved in the process. The new payroll system went live and a number of employees did not receive paychecks. Who do you think those employees called? How many of the payroll personnel knew the implications of not delivering a paycheck on payday? If a decision will impact employees, a strong, strategic-minded HR professional should be involved in the deliberations.
- Assuming you know the rules: Many organizational leaders gained their HR knowledge from “oral tradition.” Meaning, so much HR knowledge is gained from what someone else said or advised. Even if that guidance was accurate at the time, laws and regulations change quickly. Moreso, if the original advice was incomplete or inaccurate, risky and possibly illegal decisions will inevitably result. Stubbornly holding to this “oral tradition” minimizes the effectiveness of your Human Resources team. The restaurant industry serves as a great example of the folly of bad “oral tradition.” Managers dipping into gratuities, under-the-table wage payments, minimum wage not being paid, employment of minors laws not being followed, and work assignments not aligned with laws pertaining to tipped employees are all examples of how a single restaurant manager, in the absence of an effective HR function, can adopt policies from a previous employer that are not legal. Every industry has examples of how “oral tradition” creates bad assumptions and everyone knows the old adage about assumptions.
The Human Resources consultancy model (Fractional HR)
As noted above, many HR functions are best accomplished through administrative and mid-level HR professionals. Simply put, 80% of all HR matters can be handled by mid-level HR professionals or administrative support personnel. As such, why pay a 6-figure salary for a full-time HR professional when you likely only need that level of decision-making for 500 or fewer hours per year?
Because of this reality, small and medium-sized businesses should strongly weigh an HR Consultancy model. Here, the organization retains a strong HR Consultant (fractional HR Consultant) to guide and support strategic, critical, and high-level HR matters, while allocating other matters (that 80%) to internal personnel. The organization gains executive HR leadership without the full-time executive salary. Here are a couple of examples of how this works:
- A 200-employee company in the education industry employed an HR Director for several years; her salary was $110,000/year Frustrated with her performance, the CEO undertook a job survey, identifying each of her job tasks, measuring the amount of time that was invested in each task. After doing so, the CEO was shocked to learn that over 80% of what the HR Director did was administrative in nature. In other words, the 6-figure HR Director occupied the majority of her day with tasks that could be completed by someone making 40% – 50% of the salary. Recognizing this, the CEO reached out to us. He eliminated the HR Director position. He identified an exceptionally smart and talented administrative professional to take on administrative HR tasks. We fulfilled the executive HR responsibilities, assisting with strategy, high-level decision-making, and compliance, at a fraction of the $110,000 annual expense.
- The HR Director of a 3,000-employee company retired. Recognizing the heavy employee relations focus of the HR Director, we stepped in as an HR Consultant. The retired HR Director was working 50-60 hours per week, with 80% of that time allocated to high-level HR issues across the company’s 40 work sites. Because the company had a strong team of administrative and mid-level HR professionals, the consultancy model fulfilled all of the company’s needs at a 55% cost savings over what a new executive HR leader would have commanded.
- A 500-employee company in the business services sector experienced an unpredicted downturn in business. As a result, the ownership group made some difficult layoff decisions, including their HR leader. While the decision was financially necessary, the ownership group recognized that they still needed access to HR expertise. Working with their 2 HR Generalists, the consultancy model provided strategic HR leadership for less than 25% of what the HR leader was making. The company continued with this model for years while growing by 300%, eventually garnering a handsome takeover bid.
The value proposition of Human Resources – What is the ROI on Human Resources?
Whether you add HR to your organizational structure or use a fractional HR consultancy model, the value of HR expertise extends far beyond the “necessary evils” of HR paperwork and legal compliance (although legal compliance is often an area of needed improvement for small to medium-sized organizations). HR expertise offers significant returns on investment when HR expertise is integrated into the organization’s decision-making processes. Organizations with exceptional HR expertise are:
- More Innovative – Unless you are a sole proprietor, people are integral to your organization. As organizations expand, they add people to facilitate organizational growth, complete essential job tasks, and bring new ideas to the table. Exceptional HR leadership identifies and hires top talent that will accomplish these objectives. As you bring knowledgeable and committed people into the organization, you diversify experience and thought, which is what drives innovation.
- Delivering More Revenue Growth – An often overlooked component of HR leadership is the focus on mission and goals. It is a proven fact that employees who are not connected with or don’t support the organization’s mission are more dissatisfied with their job and more likely to quit. Conversely, engaged employees who see their work as valuable and are connected with the organization’s mission find great satisfaction. Where job satisfaction is found, you will find employees who are driving the activities that promote revenue growth.
- More Profitable – As revenue grows, so does profit (hopefully). But beyond the profitability driven by revenue growth, HR expertise can help grow a culture of ownership. Building a great culture within an organization, thus driving profitability, plays out in countless ways:
- The Office Manager who becomes a good steward of supplies, resources, and vendor relationships
- The Accountant who meticulously keeps financial records, balancing the books down to the penny
- The Receptionist who understands and treasures each phone call, recognizing how that call is answered, could result in a sale or a satisfied customer.
- The Store Clerk who takes personal pride in the shelves always being fully stocked and well-merchandised for customers.
- Safer work practices resulting in greater productivity and lower workers’ compensation insurance premiums.
- Lower turnover, keeping unemployment/reinsurance tax rates low.
- More Likely to Retain Their Workforce for the Long-term: Especially over the past couple of years, we have come to recognize the value of a stable workforce and the organizational pains that arise from turnover and vacant positions. Employee turnover inevitably leads to adverse outcomes – loss of key skills, loss of knowledge, loss of customers, loss of consistent execution, loss of confidence in the organization, etc.
As you weigh the value of adding HR expertise to your organization, consider your confidence in the following:
- Are you confident that the organization is 100% compliant with all applicable employment laws, workplace regulations, and wage/hour statutes?
- If you offer an employee benefits program, are you certain that the program is appropriately designed and administered as to promote employee satisfaction while minimizing annual rate increases?
- Do you actively train and develop managers/supervisors to act in a manner that promotes job satisfaction, enhances productivity, and supports the goal of making your organization an employer of choice?
- Does the organization have effective HR processes/procedures to minimize the financial risks associated with employing people?
- Are your recruitment processes effective and efficient in identifying top talent OR do you recruit and hire following the same processes everyone else is using?
- Is human resources the core competency of anyone in the organization? Are HR matters distracting me or my team from our core competencies?
- Is there an effective strategy to control variable payroll costs such as workers’ compensation premiums and unemployment insurance?
- Do you have well-designed and well-researched compensation plans ensuring you are effectively competing for top talent?
If you have answered “no” to any of these questions, then you should consider adding HR experience to your organization.