Human resources is key to SME success

The traditional textbook representation of a firm is that it is the coming together of land, labour and capital. To a large extent this is true as any company will need all three to carry out its operations.

Of these, land and capital are perhaps the easiest to manage as they can be acquired and put together. More important, but highly challenging, is labour due to the need to meet its demands so as to retain them while ensuring their optimal performance.

In large organisations this is less of a problem, as firms grow in size so do their level of complexity. This necessitates the creation of layers of management to manage and direct labour.

The increased size also leads to a greater demand for specific human resource management (HRM) practices such as annual performance appraisals, career development, etc..

Large organisations invariably develop more professional HRM practices. On the other hand, SMEs [small and medium-sized enterprises], due to their smaller size, take a more informal approach and hence less professional HRM practices.

To a certain extent this is due to the fact that employees in smaller firms often have to perform a greater variety of tasks than those in larger firms and hence specialists are less likely to be found in SMEs. Although, SMEs have less professional practices, their informal nature and close ownership implies that they are less affected by the need to align staff with the interest of the owner as they usually tend to be part of the same family.

The absence of monitoring reduces costs and improves profitability.

Such arguments have been excessively used by family-owned SMEs to have a formal HRM function. However, the reality is that family relationships within the firm are a double-edged sword and can also pose the problem of dealing with those who do not perform well.

The close family connection usually implies that the maintenance of relationships take priority over the need to take any corrective action. The lack of action tends to have a contagion impact on other employees.

Then there is the issue of employee morale and satisfaction that as non-family members of the owner they will reach their glass ceiling and will not stop progressing within the firm.

Of course a professional HRM function may not be able to deal with all the problems in one go. But it will ensure that major issues such as staff morale, training, performance monitoring etc, are dealt with in an effective and legally compliant manner.

More importantly, for family-owned SMEs it equates the treatment of family and non-family members.

The question then arises should an SME incur the additional cost and burden of establishing formal or professional practices especially if the business has survived for so long without it? To answer this question one must take a broader view and look at the risks facing SMEs.

In developed countries one of the biggest threats facing SMEs is complaints by employees which end up in employment tribunals or courts. More far-reaching risk is the ability to attract and retain talented staff. Therefore, in every SME's growth cycle there comes a time when they need to move away from informal HRM practices to a more professional system.

The writer is the head of export market intelligence at Dubai Exports.