Future of Human Resource Management (HRM) in SMEs

By Ankita Agarwal on November 24, 2012

As it is often said, the future belongs to Small and Medium-sized Enterprises (SMEs). Not only because they contribute directly to the economy in terms of output and employment, but also because they act as the ladder of success for many large firms. The SMEs are largely characterized by being small in size in their market operations and reach. They have limited access to finance and technology and normally do not have any formal organizational structures. However, the situation is changing fast and the SMEs are making their systems at par with larger organizations, especially the financial systems. The SMEs have well realized their scope in future, but one aspect that is still very much neglected relates to the Human Resource Management (HRM) in SMEs.

The present state of human resource management in SME

The SMEs usually do not follow any formal HRM practices. The ownership and management generally coincide and the owner does not possess any formal management training. The employer-employee relationships are largely based on mutual trust and understanding. Most of the times, no formal employment contract is signed with the employees and the terms and conditions of employment are only verbally agreed between the employer and the employees. There is no strict compliance with the labour laws and the employees are also often happy with mutually discussed terms and conditions, provided they are paid enough. The negligence of HRM can be assessed by the fact that most of the SMEs do not even have a separate HR department also. A survey conducted by Confederation of Indian Industries (CII) in the year 2007 revealed, around 80% of the small and 20% of the medium-sized enterprises in India did not have any formal HR department.  A large number of SMEs still pay their employees in cash and there are no proper systems for payroll accounting, employee recruitment, selection and training.

Future of human resource management in SMEs

Until the recent past, it was only the big firms investing in HRM but with time even the SMEs are considering HR functions seriously. The need for organized HR practices is well realized by most SMEs today and they are even ready to implement HRM into their organizations. But the problem they face relates to a shortage of funds and expertise required to implement HRM. The solution can take any of the two forms: either outsource the HRM function for a short span till required expertise is gained or to manage from the available resources for implementing HRM. If HRM is outsourced, though it requires investment in money, the entrepreneurs get enough time to concentrate on strategic issues rather looking after routine HR systems. But if the firm cannot adopt this option, the SMEs can do the following:

  • Recognize the right talent for the organization; may not be the best but which suits the needs of the job and organization.
  • Follow employee engagement practices so that employee retention improves.
  • Re-employment of retired employees who are ready to join at a low salary.
  • Developing a culture of accepting challenges and offering career growth in the organization.
  • Minimize the hierarchy so that employees feel a part of the organization.
  • Design practices like flexible working hours and work from home to facilitate work-life balance.