Micro, Small and Medium Enterprises (MSMEs) can be broadly defined as non-subsidiary, independent businesses with small number of employees, normally 1 to 100 and up to 500 or more for medium sized companies. For the purposes of this article, they are all being referred to as small businesses.
According to a report by World Bank, MSMEs contribute up to 45 percent of total employment and up to 33 per cent of national income (GDP) in emerging economies. The world over small businesses are recognized as the growth and development engine of any economy and Nigeria is no exception. A survey carried out by the Small and Medium Enterprises Development Agency of Nigeria (SMEDAN), in collaboration with the National Bureau Statistics (NBS) in 2013, revealed that the total number of MSMEs in the country as at 2013 stood at an estimated 37,067,416 million and with a GDP contribution of 48.47%. The sector is responsible for over 84.02% of the total employment in the country and about 13.21% of the total manufacturing output.
In the last few years, thanks to concerted effort by the government, financial institutions, technology and the start-up revolution, we have witnessed increased moves by the government to grow this segment of the economy, starting with the creation of SMEDAN, which is responsible for the promotion and development of this sector, implementation of the NEDEP (National Enterprise Development Programme)- positioned by the Ministry of Trade and Investment as an major driver of job creation and wealth generation, creation of the Micro, Small and Medium Enterprises National and State Councils, the revised National MSME Policy and access to funding through the Central Bank of Nigeria and other development banks.
Yet despite a large youth population, which according to the NBS (2012) sits at of over 60%, and abounding opportunities for growth, small businesses continue to be plagued by several challenges including lack of financial support, poor management, poor controls and compliance environment all of which have significant impact on its growth potential. According to the Organization for Economic Co-operation and Development (OECD), despite OECD countries being largely developed economies with high income and very high human development index, less than one half of small start-ups survive for more than 5 years and only a fraction of small businesses develops into high performing firms OECD countries. According to the United Nations Industrial Development Organization (UNIDO) studies have shown that only 20 per cent of small businesses manage to survive in Nigeria.
Small Business Evolution and Corresponding Human Resource Needs
A study by the Harvard Business Review, (The Five Stages of Small Business Growth) identifies 5 stages of small business growth. Existence stage, survival stage, success stage, take off stage and maturity stage. Management of the business and resources required evolve and continue to change in importance as the business transitions from one stage. A solid human resource (HR) support system play a critical role in helping small businesses transition from one stage to the other successfully and develop into a high performing organization. Consequently, it is expected that the level of HR support required at each stage of growth will also change as the business grows (see Exhibit 1).
Talent and Organisational Challenges for Small Businesses
Inability to attract high quality talent is a chief concern for many entrepreneurs. Often competing for talent with bigger businesses, inability to pay more for top talent and poor hiring practices are some of the main constraints. Most small businesses rely heavily on word of mouth to find talent which implies that they are looking through a limited pool of talent and potentially could be missing out of a more diverse talent pool.
Having highly skilled and competent talent is critical for the survival of any businesses. While big businesses can invest in systematically building talent for the future, small businesses especially during their early stages of growth are unable to make this level of commitment. As the focus is typically on growing and scaling the business, talent development and management are often not high on the priority list of the entrepreneur. HR systems and tools like appraisals, competency frameworks and job descriptions which improve organizational effectiveness are usually not well defined ultimately limiting the growth potential of the business.
Flat structures, limited career progression opportunities, undefined roles and responsibilities and an inability to offer competitive pay and benefits often translate into limited growth opportunities for talent within small businesses and trigger an intention to leave the organization making talent retention in small businesses a real challenge.
Some studies (Society for Human Resource Management (SHRM) predict it costs 6 to 9 months’ salary on average to replace a salaried employee. Employee turnover and replacement costs has huge implications for the profitability and survival of a small business running on limited resources.
By Now, I must Be Speaking to the Converted?
Hire and Retain the Best People
Having an ‘HR Partner’ onboard early in your evolution ensures that you get it right first time. Most HR professionals understand that hiring is only the 1st step in the talent lifecycle of an employee. You will be able to leverage their professional experience and expertise in ensuring the employee settles into the organization and role quickly so that s/he is able contribute their very best from day 1 which can go a long way to mitigate an early exit.
Anyone who has worked with and or led a high performing team understands that it is no cliché people are indeed your most precious asset. Having an HR Partner on board ensures that you are up to speed on any potential disengagement issues and can respond quickly to change.
The primary concern of most entrepreneurs is survival, profitability and ultimately growth. Often little focus is paid to ensuring the right people practices and infrastructure which are fundamental to securing the future and scaling the Business. Having the right HR support in place will allow entrepreneurs focus on running, growing and building a sustainable business.
Bringing It All Together
If you are a small business looking to build a sustainable business by investing in HR, what to do? Start with an understanding of where your business is in its evolution. Is it in its early stages of growth where funding and cash flow concerns prevail? At this stage perhaps all your business needs is an outsourced HR services company that can provide these services effectively and, ideally, remotely to minimize cost. As your business attains financial health, affordability improves, and the organization needs gets more complex, this may be right interval to make further investments in your own in-house HR team.
Enitan Oyenuga is a Lead Partner at HR EX Consulting, the premier online HR professional services company offering affordable subscription-based HR Advisory and Services to small businesses.