Managing Human Resources in Small and Entrepreneurial Firms

Managing Human Resources in Small and Entrepreneurial Firms

Lecture Outline:

The Small Business Challenge

How Small Business HRM Is Different

Diversity Counts

Why HRM Is Important to Small Business

Using Internet and Government Tools to Support the HR Effort

Complying with Employment Laws

Employment Planning and Recruiting

Employment Selection

Employment Training

Employment Appraisal and Compensation

Employment Safety and Health

Leveraging Small Size with Familiarity, Flexibility, Fairness and Informality 

Simple, Informal Employee Selection Procedures

Flexibility in Training 

Flexibility in Benefits and Rewards

      Fairness and the Family Business

Using Professional Employer Organizations

How Do PEOs Work?

Why Use a PEO?

Caveats

Managing HR Systems, Procedures, and Paperwork

Introduction

Basic Components of Manual HR Systems

Automating Individual HR Tasks

Human Resource Information Systems (HRIS) 

Improved Transaction Processing

Online Self-Processing

      Improved Reporting Capability

      HR System Integration

      HRIS Vendors

      HR and Intranets

In Brief:  

This chapter discusses that entrepreneurs have some special human resource management needs.  The main purpose of this chapter is to outline and apply effective human resources principles and practices to running a small business.  The main topics addressed include understanding the small business challenge; using Internet and government tools to support the HR effort; leveraging small size with familiarity, flexibility, fairness, and informality; using professional employer organizations; and managing HR systems, procedures, and paperwork.  

Interesting Issues:  

Most people graduating from college in the next few years either will work for small businesses or will create their own small businesses, which are firms with fewer than 200 employees.

Learning Objectives: 

1. Explain why HRM is important to small businesses and how small business HRM is different from that in large businesses.

2. Give four examples of how entrepreneurs can use Internet and government tools to support the HR effort.

3. List five ways entrepreneurs can use their small size to improve their HR processes.

4. Discuss how you would choose and deal with a professional employee organization.

5. Describe how you would create a start-up human resource system for a new small business.

Annotated Outline:

I. The Small Business Challenge

A. How Small Business Human Resource Management Is Different – Managing human resources in small firms is different for four main reasons: size, priorities, informality, and the nature of the entrepreneur.

1. Size – The general guideline is that it’s not until a company reaches the 100-employee milestone that it can afford a human resource specialist.  However, even five- to six-employee organizations must recruit, select, train, compensate, and retain qualified staff. 

2. Priorities – It is not just size but the realities of the entrepreneur’s situation that drive them to focus their time on non-HR issues. 

3. Informality – Human resources management activities tend to be more informal in smaller firms.  Entrepreneurs must be able to react quickly to changes in competitive conditions.

4. The Entrepreneur – Entrepreneurs are people who create businesses under risky conditions, and starting new businesses from scratch is always risky.  Entrepreneurs therefore need to be highly dedicated and visionary.

5. Implications  – The differences listed above result in potential implications. 1) Small business owners run the risk that their relatively rudimentary human resource practices will put them at a competitive disadvantage. 2) There is a lack of specialized HR expertise as compared with larger firms that have a full range of HR functions. 3) The smaller firm is probably not adequately addressing potential workplace litigation.  Most small business owners are well aware of the threat of employment-related litigation.  4) The small business owner may not be fully complying with compensation regulations and laws.  5) Duplication and paperwork leads to inefficiencies and data entry errors.  For small businesses, employee data often appears on multiple human resource management forms.

B. Diversity Counts – More men than women start new businesses, but according to one study, about 100 million women in 59 countries still started new businesses in one recent year. Interestingly, most of the women who did start businesses were not in the developed world. The most likely countries for women to start businesses were in Latin America and sub-Saharan Africa. This may be because in developed economies, women have more career options. In developing economies such as Ghana, necessity infuses a confidence that drives more women to make it on their own.

C. Why HRM Is Important to Small Business – Entrepreneurs need all the advantages they can get, and for them, effective human resource management is a competitive necessity.  Small firms with effective HR practices perform better than those with less effective practices.

II. Using Internet and Government Tools to Support the HR Effort

A. Complying with Employment Laws – Small business owners spend much of their time tackling issues related to employment laws.  These owners can quickly find the answers to many such questions online at federal agencies’ Web sites such as the following: 

1. The DOL – The U.S. Department of Labor’s First Step Employment Law Advisor (www.DOL.gov) helps small employers determine which laws apply to their business. 

2. The EEOC – The U.S. Equal Employment Opportunity Commission (www.EEOC.gov) guides small employers on all laws pertaining to employment discrimination. 

3. OSHA – The DOL’s Occupational Safety and Health Administration site (www.OSHA.gov) supplies guidance for small business owners. 

B. Employment Planning and Recruiting – Internet resources can make small business owners almost as effective as their large competitors at writing job descriptions and building applicant pools.  Small business owners can use the online recruiting tools to post positions or popular Internet job boards. 

C. Employment Selection – For the small business, one or two hiring mistakes could wreak havoc.  Some tests are so easy to use they are particularly good for smaller firms. One example of such a test is the Predictive Index, which measures work-related personality traits, drives, and behaviors.  

D. Employment Training – Although small companies can’t compete with the training resources of larger organizations, Internet training can provide, at a relatively low cost, the kinds of professional employee training that was formerly beyond most small employers’ reach. 

1. Private Vendors – The small business owner can tap hundreds of suppliers of prepackaged training solutions.

2. The SBA – The federal government’s Small Business Administration (www.SBA.gov) provides a virtual campus that offers online courses, workshops, publications, and learning tools aimed toward supporting entrepreneurs. 

3. NAM – The National Association of Manufacturers (NAM) is the largest industrial organization in the United States.  NAM’s Virtual University (www.namvu.com) helps employees maintain and upgrade their work skills and continue their professional development. 

E. Employment Appraisal and Compensation – Even small employers now have easy access to computerized and online appraisal and compensation services.  Lack of easy access to salary surveys once made it difficult and time consuming for smaller businesses to fine tune their pay scales. 

F. Employment Safety and Health – Without human resource managers or safety departments, small businesses often don’t know where to turn for advice on promoting employee safety.  OSHA provides free on-site safety and health services for small businesses.  The OSHA Sharp program is a certification process through which OSHA certifies that small employers have achieved commendable levels of safety awareness. 

III. Leveraging Small Size with Familiarity, Flexibility, Fairness and Informality 

A. Simple Informal Employee Selection Procedures – In general, small firms tend to rely on more informal employee selection and recruitment practices, such as employee referrals and unstructured interviews, than do large firms. Work sampling tests require candidates to perform actual samples of the job in question. This can also be a very simple way to select employees.

B. Flexibility in Training – Small companies typically take a more informal approach to training and development.  Smaller firms also tend to focus any management development training on learning specific firm-related competencies.

C. Flexibility in Benefits and Rewards – The Family and Work Institute surveyed the benefits practices of about 1,000 small and large companies.  They found that large firms offer more extensive benefit packages than do small ones.  However, many small firms seemed to overcome their bigger competitors by offering more flexibility.

1. A Culture of Flexibility – Because of the familiarity that comes from owners personally interacting with the employees each day, small businesses do a better job of fostering a culture of flexibility. 

2. Work-Life Benefits – Even without extensive resources, small firms can offer employees work-life benefits that larger employers cannot match.  For example, additional time off, compressed workweeks, flexibility, and other benefits that can be offered because of their relatively small size.

D. Fairness and the Family Business – Most small businesses are family businesses, in that the owner and one or more managers are family members.  Being a nonfamily employee here isn’t always easy.  They sometimes feel like outsiders.  Some best practices to avoid partiality include setting ground rules, treating people fairly, and erasing privilege.

IV. Using Professional Employer Organizations

A. How Do PEO’s Work? These vendors range from payroll companies to those that handle all of an employer’s human resource management requirements.  PEOs have several characteristics.  By transferring the client firm’s employees to the PEO’s payroll, PEOs become co-employers of record for the employer’s employees. 

B. Why Use a PEO? Employers turn to PEO’s for several reasons.

1. Lack of Specialized HR Support – Up to 100 or so employees, small firms typically have no dedicated HR managers, and even larger ones may have few specialists. 

2. Paperwork – The Small Business Administration estimates that small business owners spend up to 25% of their time on personnel-related paperwork.  This includes background checks, benefits sign-ups, and so on.

3. Liability – Staying in compliance with pension plan rules, Title VII, OSHA, COBRA, the Fair Labor Standards Act, and other personnel-related laws can be distracting.

4. Benefits – Insurance and benefits are often the PEO attraction.  Obtaining health and other insurance is often more challenging for smaller firms.

5. Performance – The professionalism that the PEO brings to recruiting, screening, training, compensating, and maintaining employee safety and welfare will hopefully translate into improved employee and business results. 

C. Caveats – Many employers view their human resource management processes as a strategic advantage, and they are not inclined to turn over strategy-sensitive tasks like screening and training to third-party firms. 

V. Managing HR Systems, Procedures, and Paperwork

A. Introduction – Recruiting and hiring an employee might require a help wanted advertising listing, an employment application, an interviewing checklist, and the verification of education and immigration status.

B. Basic Components of Manual HR Systems – Very small employers will probably start with a manual human resource management system.  This would include obtaining and organizing a set of standardized personnel forms covering each important aspect of HR.

1. Basic Forms – Forms that should be considered include an application, reference check, employee record, performance evaluation, vacation request, corrective counseling, and exit interview.

2. Other Forms – Several direct-mail catalog companies offer a variety of HR Materials.  Firms such as HRdirect (www.hrdirect.com), or G. Neil Company (www.gneil.com) can provide a comprehensive source of all needed HR forms.

C. Automating Individual HR Tasks – As the small business grows, it becomes increasingly unwieldy and uncompetitive to rely on manual HR systems.  A company with 40 to 50 employees should consider computerizing individual human resource management tasks.

1. Packaged Systems – There are a variety of resources available.  At the Web site of the International Association for Human Resource Information Management (www.ihrim.org), a categorical list of HR software vendors can be found.  Automating Individual HR Tasks.

D. Human Resource Information Systems (HRIS) – The term information system refers to the interrelated people, data, technology, and organizational procedures a company uses to collect, process, store, and disseminate information.

E. Improved Transaction Processing – HRIS packages substitute powerful computerized processing for a wide range of the firm’s HR transactions.

F. Online Self-Processing – HR information systems make it possible to make the company’s employee part of the HRIS.  For example, an organization can allow employees to self-enroll in all desired benefit programs.

G. Improved Reporting Capability – The HRIS system integrates numerous individual HR tasks, thereby increasing HR’s reporting capabilities.

H. HR System Integration – When the HRIS’ software components, such as payroll and record keeping, are integrated, the employer can dramatically reengineer its HR function.

I. HRIS Vendors – The Web site for the International Association for Human Resource Information Management (www.ihrim.org) provides a comprehensive list of HR vendors.

J. HR and Intranets – Employees can access the organization’s employee benefits home page and other useful HR information from this site. 

Improving Performance Questions: 

18-1: Write a short note on this topic: “What Carlos Ledezma is doing right with respect to HR management, based on what I’ve read about HR in the other chapters of this book.”

18-2: List two situation questions (what would you do . . .?) and two behavioral questions (what did you do . . .?) that you might ask to unearth insights into the candidate’s motivation.

Discussion Questions:

18-3: How and why is HR in small businesses different than that in large firms?

Human resource management activities tend to be more informal in smaller firms.  For example, one study analyzed training practices in about 900 family and non-family small companies.  Training tended to be informal, with an emphasis, for instance, on methods like coworker and supervisor on-the-job training.  Such informality isn’t just due to lack of expertise and resources; it is also partly a matter of survival.  Entrepreneurs must be able to react quickly to changes in competitive conditions.

18-4: Explain why HRM is important to small businesses. 

Small firms need all the advantages they can obtain, and for them effective human resource management is a competitive necessity.  Small firms that have effective HR practices do better than those with less effective practices.  For many smaller firms, effective human resource management is also a condition for getting and keeping big customers.  This means that even small businesses must attend to their human resource processes.

18-5: Explain and give at least five examples of ways entrepreneurs can use small size familiarity, flexibility, and informality—to improve their HR processes.

Small business owners spend much of their time tackling legal issues.  These small business owners can quickly find answers to many such questions online at the following:  The Department of Labor or DOL.gov, the EEOC or EEOC.gov, the Occupational Safety and Health Administration or OSHA.gov, and the Society of Human Resource Management or SHRM.org.

18-6: Describe with examples how you would create a startup, paper-based human resource system for a new small business.

Very small employers will probably start with a manual human resource management system.  From a practical point of view, this generally means obtaining and organizing a set of standardized personnel forms covering each important aspect of the HR recruitment, selection, training, appraisal, compensation, and safety process, as well as some means for organizing all this information for each of your employees.

Individual and Group Activities:

18-7: Form teams of five or six persons, each with at least one person who owns or has worked for a small business. Based on their experiences, make a list of the 

“ inadequate-HR risks” the business endured, in terms of competitive disadvantage, lack of specialized HR expertise, workplace litigation, compensation laws compliance, and paperwork/data-entry errors.

Lack of effective and sophisticated recruitment strategies, additional legal issues due to lack of HR expertise, lack of training which may lead to employment discrimination or sexual harassment claims, small business may not comply with complex regulations and laws, lack of an HRIS system may lead to more timely processing of data as well as more manual errors.

18-8: You own a small business, and you are confused about which of your employees is eligible for overtime pay. The employees in question include your secretary, two accounting clerks, one engineer, and two inside salespeople. Individually or in groups of four or five students, use the DOL’s Overtime Security Advisor and DOL’s Calculator to determine who gets overtime pay.

The secretary and two accounting clerks should be classified as non-exempt, and the engineer and two inside salespeople should be classified as exempt.

18-9: You have about 32 employees working in your factory. Working individually or in teams of four or five students, find and create a list of five online sources you could use to provide training to them, at no cost to you or to them.

Here are 5 to start: www.DOL.gov, www.strategichr.com, www.ASTD.org, www.legalworkplace.com, and www.articlebased.com.

18-10: Appendix A, PHR and SPHR Knowledge Base at the end of this book lists the knowledge someone studying for the HRCI certification exam needs to have in each area of human resource management (such as in Strategic Management, Workforce Planning, and Human Resource Development). In groups of four to five students, do four things: (1) review Appendix A; (2) identify the material in this chapter that relates to the required knowledge Appendix A lists; (3) write four multiple-choice exam questions on this material that you believe would be suitable for inclusion in the HRCI exam; and (4) if time permits, have someone from your team post your team’s questions in front of the class, so that students in all teams can answer the exam questions created by the other teams.

The material from this chapter that is applicable to the HRCI certification exam would include:  the HR challenges of small business, how small organizational differences affect HRM, how to implement a small business, HR system, staffing the small organization, and training and maintaining employees of small businesses.

Experiential Exercise: Building an HRIS

Purpose: The purpose of this exercise is to give you practice in creating a human resource management system (HRIS).

Required Understanding: You should be fully acquainted with the material in this chapter.

How to Set up the Exercise/Instructions: Divide the class into teams of five or six students. Each team will need access to the Internet. Assume that the owners of a small business come to you with the following problem. They have a company with less than 40 employees. They have been taking care of all HR paperwork informally, mostly on slips of paper and with memos. They want you to supply them with a human resource management information system—how computerized it is will be up to you, but they can only afford a budget of $5,000 upfront (not counting your consulting), and then about $500 per year for maintenance. You know from your HR training that there are various sources of paper-based and online systems. Write a two-page proposal telling them exactly what your team would suggest, based on its accumulated existing knowledge, and from online research.

Video Case Appendix:

Video Title: Managing Human Resources in Entrepreneurial Firms (Blackbird Guitars)

Synopsis:

With about 10 employees, Blackbird Guitars must rely on cross-training and job rotation and relatively informal HR management. Founder Joe Luttwack uses various online HR information sources, and pays close attention to California labor laws, where the company resides. An interesting question is how the company will manage growth in production and workforce, since they’re now thinking of expanding into retail sales.

Discussion Questions:

18-11: Based on what you read in this chapter, what other online sources would you suggest Blackbird use to improve its HR practices?

18-12: Outline five other steps Blackbird should be using to have an improved HR function.

18-13: What do you think accounts for the fact that turnover is low?

Application Case: Netflix Breaks the Rules

In many respects, the Netflix HR strategy seems like a dream come true for small businesses. You don’t need a pay plan; instead, you just update each person’s pay every few months based on market surveys. You offer no training and development. And you don’t track vacation time, more or less. If someone’s not doing well, you just pay him or her to leave, with no hassles. Netflix seems to have hit upon its own version of “Netflix High-Performance Work Practices.” Given that, answer the following questions (please be specific).

18-14: What (if anything) is it about Netflix that makes its HR practices work for it?

Student answers will vary and may include a discussion of the company’s culture. The culture is such that people are treated as adults and are able to “police themselves.” Everyone understands that not performing up to the company’s expectations will result in termination. Frequent pay raises and the constant updating to stay competitive with the market helps to keep motivation high.

18-15: Would you suggest using similar practices in other businesses, such as a new restaurant? Why?

Again, students will vary in their answers, but look for their arguments to be grounded in logical arguments to support their viewpoint. 

18-16: List the criteria you would use for deciding whether another company is right for Netflix-type HR practices.

Criteria may include looking at the following areas: the current compensation system (Does the company pay at or above market wages?), the strength of the corporate ethical culture (Companies who are to be successful at this type of HR system must be highly ethical and as they must, to a certain degree, be honest and open about the work they are doing.), and the organization needs to be one where individuals can work independently of one another so to maintain workflow and quality while dealing with such extreme flexibility in the scheduling.

18-17: What argument would you make in response to the following: “Netflix just lucked out; they would have done even better with conventional HR practices?”

Student answers will vary. Either side is debatable, so look for students to defend their arguments with logical arguments from the book.

Continuing Case: Carter Cleaning Company - Cleaning in Challenging Times

18-18: Assume that we don’t want to terminate any of our employees. What work-scheduling related changes could we make that would reduce our payrolls by, 20% per week but still keep all our employees on board?

One of the benefits of a small employer is the ability to adapt to changing market conditions.  Therefore, flexible work scheduling could be easily implemented to cover all required costs while keeping staffing costs at a minimum.  Even offering the staff the option to take time without pay could prove beneficial to the employer while maintaining current staffing levels.

18-19: We are currently handling most of our personnel-related activities, such as sign-ons, benefits administration, and appraisals, manually. What specific suggestions would you have for us in terms of using software systems to automate our HR processes?

A packaged system would probably prove cost effective for this size employer.  These types of systems offer programs for controlling attendance, maintaining employee records, writing job descriptions, and other HR-related requirements.

18-20: Suggest at least five free Internet-based sources we could turn to for helping us to lower our total employment costs.

The International Association for Human Resource Information Management (www.ihrim.org), the Small Business Administration (www.sba.gov), the U.S. Department of Labor’s – First Step Law Advisor (www.dol.gov/elaws/firstep), OSHA’s Small Business Handbook (www.osha.gov), and the National Association of Manufacturers (www.namvu.com).

Hotel Paris: Improving Performance at the Hotel Paris - The New HRIS

18-21: Using any benchmark data that you can find, including information from this textbook, what are some benchmark metrics that Lisa could be using to assess the efficiency of her human resource management operations? To what extent does the Hotel Paris’s quality service orientation enter into how Lisa’s metrics should compare?

Lisa should consider looking at benchmarking data on the following HR activities:  benefits, work schedules/locations, compensation options, workforce demographics, training, development, and technology.  Lisa should review carefully the Hotel Paris’s quality service orientation as it compares to Lisa’s metrics to determine the cost effectiveness of each activity.

18-22: Throughout this textbook, we’ve discussed various specific examples of how human resource management departments have been reducing the cost of delivering their services. Keeping in mind the Hotel Paris’s service quality orientation, please list and explain with examples how Lisa Cruz could use at least five of these.

Information technology could greatly help Lisa reduce the human resource administration’s current costs; in addition, Lisa could look at the resources available from the Small Business Administration as well as the Department of Labor.  Also, Lisa could consider outsourcing some of the more costly HR activities to a PEO.

18-23: Focusing only on human resource information systems for a moment, which systems would you suggest Lisa consider recommending for the Hotel Paris? Why?

A packaged program would prove the most cost effective for the Hotel Paris. Online self-processing should prove especially beneficial to Lisa in order to help improve efficiency, accuracy, and cost reductions.

18-24: Explain with detailed examples how Lisa can use free online and governmental sources to accomplish at least part of what you propose in your previous answers.

Lisa could review the resources offered from the Small Business Administration as well as the Department of Labor.

18-25: Give three examples of fee-based online tools you suggest Lisa use.

Transaction-processing systems, management information systems, and executive support systems

18-26: Do you suggest Lisa use a PEO? Why?

Lisa should consider the use of a PEO for at least some of her HR programs.  For example, payroll and benefits administration could prove very cost effective for Lisa since her HR costs are currently running 30% higher than comparable organizations.  Very often PEO’s can offer comprehensive services at competitive fees.

（中国经济管理大学MBA公益课堂---美华管理人才学校---28年知名管理培训机构）

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