Finding the “right staff” in small firms Abstract Purpose – The purpose of this paper is to explore what owners of small firms are looking for from new employees. The aim is to pursue this in light of the debate around formality and informality of small firm HRM, exploring the extent to which the small firms studied had formalised HRM practices. Design/methodology/approach – The data reported here were collected in discussions with the owner(s) of 27 small firms in the Latrobe Valley region of South East Victoria, Australia. These firms were participating in the federal government-funded small business assistance program and data were gathered through a series of visits and discussions with the owners over the period of the assistance program. Findings – It was found that in those firms where they had formalised HRM practices, which linked directly to their strategy, employers were more able to “sell” their vision for the business to potential employees. Research limitations/implications – Research has shown that there is a positive relationship between small firm growth and the formalisation of HRM policies. However, this paper is based on discussions with people who were taking action to acknowledge and address issues affecting their business and so their experience may not be generalisable to other small businesses. Originality/value – This paper makes an original contribution of exploring the area of HRM in small firms and is hopefully a reminder to small business owners that HRM issues and small business advisers can play a critical role in the structure of their HRM practices – helping them to decide whom they want to recruit and how to go about it. Keywords Human resource management, Small enterprises, Business improvement, Australia Paper type Research paper Introduction Owners of small firms frequently lament the difficulty of finding the “right” staff. Recruitment and selection is an operational human resource management (HRM) activity being the means by which new employees are brought into the firm. When it is considered from a strategic perspective then recruitment and selection is a critical component in ensuring the personal and job requirements needed to achieve the overall business objective are achieved. The purpose of this paper is to explore what it is small firm owners are looking for from new employees. We do this in light of the debate around formality and informality of small firm HRM and we explore the extent to which the small firms we studied had formalised HRM practices. In this paper we focus on 27 small firms located in the Latrobe Valley region of South East Victoria, Australia. This region is about 150 kilometres east of Melbourne and has a population of around 70,000 people spread across 1,400 square kilometres. It is made up of four major urban centres (Churchill, Moe, Morwell and Traralgon) and their surrounding areas. Since the mid-1980s this region has suffered massive organisational change, industrial and workforce restructuring, primarily driven by the privatisation of the power industry (Fletcher, 2002; Gough and Pullin, 1996; Rainnie and Paulet, 2003; Rainnie et al., 2005). As a result of the ongoing negative effects of these changes a Ministerial Taskforce was established by the Victorian Premier in December 2000 to: examine the issues confronting the Latrobe Valley and report to [the Premier] on a course to provide a range of assistance, both economic and social (Government of Victoria, 2001, p. 1). In June 2001 the Taskforce recommended a A5.8 million funding package to facilitate longer term economic growth, boost business and community confidence and improve economic and social opportunities to those most disadvantaged in the Latrobe Valley. The Taskforce noted that: the absence of a strong commercial culture amongst small businesses in the Latrobe Valley is an enduring legacy of the SECV’s [State Electricity Commission of Victoria] complete dominance of the local economy . . . .the small business sector in the Latrobe Valley is “doing it tough” and requires assistance to overcome the many barriers it faces (LV Ministerial Taskforce Report, 2001, p. 69). To encourage and support small business growth six projects costing A0,000 were undertaken. A total of A,000 was spent on 30 small business owners receiving one-on-one mentoring to help them develop and action plan for their business (see Barrett et al., 2004). Following the completion of that project a further A,000 was provided by the federal government to continue the mentoring to ensure those small business owners implemented the actions in their plan. Owners of 22 of the small businesses continued with the project and eight new participants were also recruited to develop and implement a plan for their business. The 27 firms we report on in this paper are drawn from this group of 30 small businesses. Acknowledging the region in which these firms operate is important in terms of understanding the nature of the labour market. In this region unemployment stood at 14 per cent at the beginning of 2001, although in recent times the level has fallen to below 7 per cent. In comparison with the unemployment rates for the larger South Eastern Victorian area and the whole state of Victoria, in the Latrobe Valley unemployment rates have been higher. During the period of the project (2003-2004), unemployment rates fell and then rose: for example, at the start of 2003 unemployment stood at around 10 per cent but it fell to around 7 per cent in December of that year, before starting to rise once more to around 9 per cent (GRIS, 2006). In this region some 31 per cent of the population had a tertiary or post-secondary qualification at the 2001 Census while another 25.5 per cent had finished their secondary schooling (GRIS, 2006). Moreover, having one of Monash University’s campuses in the region means there is both a supply of graduates in a range of disciplines as well as domestic and international students seeking casual work during semester time (March-November). However, factors external to the business make recruiting the right staff problematic. These can be more difficult for smaller firms to overcome than larger ones, as small firm may not be able to compete on wages. While theoretically there is available labour in this region, shortages of particular skilled workers do exist as they do in other Australian rural and regional areas. In recognition of this problem the State government’s A0 million “Provincial Victoria” advertising campaign has been run to try to stem the flow of people to the cities and encourage people to move to country areas (see www.provincialvictoria.vic.gov.au). This is consistent with the more general approach by state and federal governments for marketing to change perceptions of the image of regional Australia (Regional Business Development Analysis Panel, 2003). At the time of the small business project, a A,000,000 marketing campaign ran in the Latrobe Valley region with the express aim of boosting external awareness of the region and its attractiveness as a place to live, work and invest. However, our interest in this paper is in those factors that are internal to and controllable by the firm. By doing so our objective is to understand what type and form of appropriate assistance can be developed and delivered to small firm owners to help them address the demands and challenges of firm growth. In the next section of the paper we locate the discussion within the literature on HRM in small firms. We then follow this with some more context of the data collected and report and discuss our findings. We conclude the paper by drawing out some suggestions for further research, as well as what practitioners and small business advisors can do to assist small firms facing HRM problems. HRM in small firms A range of studies confirm that HRM in small firms is characterised by informality (for overviews see Cardon and Stevens, 2004; Cassell et al., 2002; Heneman et al., 2000). What this means is that the practices used to recruit, select, manage and appraise employees’ performance are not written down (for example, a list of skills and qualifications for each job), regularly applied (for example, yearly performance reviews) or guaranteed they take place (for example, employer sponsored training). Written, regular and guaranteed are the three criteria de Kok and Uhlaner (2001) use to define whether a practice is formal or not. An informal recruitment practice might therefore be the use of “word-of-mouth” advertising, while using family membership or friendship as the overriding criteria for selecting a new employee would be an example of an informal selection practice. Studies of small business recruitment (for example, Atkinson and Meager, 1994; Carroll et al., 1999) point to a reliance on these informal practices, particularly word-of-mouth. This increases as size decreases, to the point where recruitment in the smallest businesses can be conditional on the availability of a known individual (Atkinson and Meager, 1994). While informal recruitment and selection methods may be preferred because they can be an effective means of ensuring new recruits “fit in” (Marlow and Patton, 1993), they could also lead to the employment of the “wrong” or “not quite right” person, as the larger pool of suitable recruits remains untapped (Carroll et al., 1999). Accusations of indirect discrimination in selection processes could also occur where the person most like the employer or interviewer is selected rather than the best person for the job. Practices that are convenient, inexpensive and directly controllable by the firm, such as those above, are frequently used in small firms. As Taylor (2006, p. 487) argues “Recruitment and selection are activities that enable small firm owners to express their temperaments and ambitions in ways that may not fit with a rational or managerial approach to HRM” and this is why informality in small firm HRM can be seen as problematic. However, the lack of formalised HRM practices in small firms can be explained in a number of ways other than that proposed by Taylor (2006). Small firms can suffer from “resource poverty” (Welsh and White, 1981, p. 18) or a “liability of smallness” (Heneman and Berkely, 1999, p. 53) and this presents unique issues around the practice of HRM which can be manifest in a number of ways: as a lack of resources and stability (Ranger-Moore, 1997), or in terms of their organisational attractiveness (Cardon and Tarique, 2008) or legitimacy as employers (Williamson, 2000; Williamson et al., 2002; Williamson and Robinson, 2008) to potential employees. It also means that formalised HRM practices are relatively more costly and time consuming to implement in small firms than in larger firms (McEvoy, 1984; Reid et al., 2002), especially as they are unlikely to have the managerial resources and expertise in the area of HRM (Chandler and McEvoy, 2000; Hornsby and Kuratko, 1990; 2003; Klaas et al., 2000; McLarty, 1999). Moreover, developing and implementing formalised HRM practices may not be seen as an investment in a vital firm resource. Indeed, as Welbourne and Andrews (1996) demonstrate in their study of IPO firm performance, firms scoring high on HR value, for example through the provision of long-term rewards, had an increased chance of survival. However, they also found that high employee value was negatively associated with short term performance. Similar conclusions were drawn in the Dutch study reported by Sels, De Winne, Maes, Delmotte, Faems and Forrier (2006a, b) where they showed that “intensive HRM can influence the financial health of small firms both positively and negatively” (Sels et al., 2006a, p. 337). The costs associated with formalising HRM may be why various studies have shown other management functions to take precedence over HRM (McEvoy, 1984). For example, Ardichvili et al. (1998) found in their study of 576 US start-ups over a ten-year period that the delegation of HRM issues lagged well behind the delegation of accounting, production and information systems. While informal HRM practices can and do work for firms, their sustainability in periods of growth can be more problematic. As small firms grow managers may exhaust their informal staffing contacts (for example, family members, referrals and “walk ins”) and more formal methods may be needed to recruit employees needed to sustain growth (Arthur, 1995). Studies have shown that this is the case in growth oriented small firms. For example, Barrett and Mayson (2007) analysis of survey data from 600 small firms across Australia found that growing small firms, where growth was defined as employing new staff because of expansion or diversification, rather than simply replacement of employees, were more likely to use formal recruitment and selection practices than non-growing small firms. Kotey and Slade (2005) study of 1,330 micro, small- and medium-sized firms (N ¼ 371) also found that there was increasing standardisation and documentation of HRM practices as the firm grew. Similar results were found by Nguyen and Bryant’s (2004) in their study of HRM formality in Vietnamese small firms (N ¼ 83). While it is not possible to determine causality in these studies, the evidence does point to a positive relationship between formalised HRM and firm performance when it is measured as higher perceived productivity, and lower workforce and voluntary turnover (Way, 2002), profit growth (Nguyen and Bryant, 2004) or sales (Barrett and Mayson, 2007). The small firm owner manager plays key role in aiming for and sustaining growth. As Gibb and Scott (1985) argue, it is the strategic awareness and personal commitment of the owner that contributes to goal achievement in firms that seek to expand their markets. Small firm owners also have a significant influence over the take up and formalisation of HRM practices. For example, Baron et al. (1996) show that the owner’s “blueprint” for HRM at the founding of the firm exerts a significant effect over the type, nature and speed of HRM practices adopted over the evolution of the firm. While in a companion paper, Hannan et al. (1996) show that this “blueprint” has long lasting effects, with the “logics” of the system only changing under considerable pressure. Drummond and Stone (2007) also point to the role of small business owner on the establishment, operation and coherence of high performance work systems. In light of this literature in the next section of the paper we report what small business employers were looking for in new employees. We also explore the level of formalisation of the HRM function in these firms to see whether this can explain why the problem, as it is articulated, exists. Data collection The data reported here was collected in semi-structured with the owner(s) of 27 small firms in the Latrobe Valley region over the 12-month period they participated in the federal government funded small business assistance program. As explained earlier in the paper, the aim of this program was for the owners of each of these firms to receive one-on-one mentoring from a business consultant to help them to implement or develop an action plan to achieve their business goals. Over the 12 months of the program (2003-2004) the small firm owner(s) were visited at least six times by the consultant (Neeson) and Latrobe City officer (Billington) to discuss the development and/or implementation of their action plan. In this region small firms make up over 90 per cent of the business population (Snell et al., 2002) and dominate all industry sectors. The 27 firms studied operated across an array of industries and ranged from food service to specialist manufacturing. The majority were service sector firms, reflecting the predominance of the retail and property and business services industries in the region (14.2 per cent and 16 per cent of establishments in the region respectively) (GRIS, 2006). All 27 small firms participating in this program were developing and expanding. All employed staff – the smallest employed one person only (in addition to the owners) on a part-time basis, while the largest was a labour hire company and employed ten permanent employees with 345 contractors on the books. Although each of the firms differed in size and industry, they were family-owned, operated in the same region and had access to the same infrastructure and resources provided by the three levels of government in the region. The data reported in this paper reflects the stage the business had achieved by the end (June 2004) of the one-on-one mentoring program. The key issues reported in the next section cover what the “problem” of finding the right staff means, whether these firms have formalised their HRM practices and if so whether this makes a difference. Finding the right staff and formalised HRM practices In the majority (24) of firms owners had experienced difficulties with recruiting the “right” staff for their business. What this meant was that five of them were seeking part-time employees who needed to be flexible with working hours. The need for employees to be flexible with their hours was exacerbated by seasonal workflows and uneven business demand and this meant that up to a third of the businesses were only able to offer part-time or casual (hourly) employment. In 11 firms employers had difficulty seeking new employees with specific qualifications or experience requirements such as a truck driving licence or safe food handling certification. For these employers, their recruitment problem was further intensified by real and widespread skills shortages, which are often more particularly felt in regional areas. Four of these small employers found it difficult to recruit skilled employees including two health care workers, a chef and a baker. Where specific qualifications or training were required, then these were more easily assessed – such as a heavy vehicle driving licence, scuba diving ticket, or office administration certification. However, the size of these small businesses meant employers also wanted employees who would be multi-skilled. For example, one small business owner wanted a qualified glazier who had good customer service and interpersonal skills. The employer also wanted to be certain that the person they employed would be punctual for appointments with clients. In another small business the nature of the physically demanding and relatively dangerous work meant the employer required someone who could not only undertake the task but a person who also looked after their own health and fitness. Overall, seven of the employers wanted new employees with the “right” attitude. Additionally, five employers in this group also wanted new employees with specific skills, qualifications or experience. However, quite what the “right” attitude meant was difficult to determine and probing revealed employers wanted employees to have an attitude to work and the business similar to their own. Ideally, employers wanted employees who reflected their own philosophy, had a passion for the business or held similar work or quality standards. Other desirable attributes included such things as “a good disposition” or “the ability to show initiative” or “team spirit”. Additionally, while some employers preferred employees who were non-smokers or single, asking for this is discriminatory. Ensuring that employees sustained a high level of work performance in an unsupervised environment or when working out of the office or at a client’s location, was also an important requirement for eight of the employers. They wanted to know that employees would turn up to work offsite or at a client’s location in neat and suitable clothing, arrive on the job on time, give a high level of customer service or complete unsupervised work to a satisfactory standard. Formalised HRM practices were in place 16 of the firms. This meant that when they were recruiting and selecting new employees for example, a list of skills and qualifications required was used in the interview. In one firm the process was explained as follows: We have this three-month probation, we go through a pretty lengthy induction with them when they start and we give them a copy of what we call our own induction papers, which we go through with them. We then say “take it home and talk about it with your wife or your partner or whoever and if at the end of the day you think this looks really good, this is the sort of organisation I would like to work in, terrific, fill in the application and send it back. But if you think, oh yeah right, well just don’t bother because that will do us all a favor then”. Although two-thirds of the employers were able to articulate the attributes those without a structured interview process found it difficult to assess whether potential new employees had these attributes. In those firms where they had formalised HRM practices, which linked directly to their strategy, employers were more able to “sell” their vision for the business to potential employees. In the majority of those businesses with formalised HRM practices the employer was able to articulate what they required from new staff and were happy with the staff they could recruit. This was important for the firm’s subsequent performance as one employer explained, saying “you are only as good as your worst employee on the day”. As discussed earlier, there is a range of factors which can explain the existence or not of formalised HRM practices in small firms. Discussions with the small firm owners highlighted that their management style – based on a set of values that shaped how they dealt with people – played a significant role. While many employers valued informality and the “personal touch” it implied they were also aware that firm growth put pressure on management. One employer made this explicit when he explained: When the business was small the staff became part of the family. If the staff member had a problem we could talk about it and work on solving it. However, as the business has grown, the dynamics have change and there are fewer opportunities to be like an extended family. Another employer said, “Staff make or break your business. It’s great when you have a good relationship with them and they have their heart in your business”. However, this employer recognised that this needed to be worked on with appropriate systems in place to ensure his employees “know what is expected of them”. The level of formality in HRM practices also impacted on the likelihood of delegating responsibilities to others either within or outside the firm. Overall, three of the 27 small business owners had delegated some of their HRM functions (for example, recruitment and payroll functions) to a person within the business or outsourced it completely to an external agency such as a professional association. Underpinning this delegation was effective communication practices, and as one employer explained, “appropriate delegation results in shared decision making”. This contrasted with five employers who thought that delegation would lead to a loss of personal control over the business. But those who had delegated responsibilities recognised the need to do so and were therefore willing to lose that level of personal control. “I just don’t have time to do everything myself and to progress my business, so I have to let go of some things”, was how the owner of one of these growing businesses explained it. Conclusions Through discussions with owners of 27 small businesses in the Latrobe Valley region of Australia we have explored what it is small firm owners are looking for in new employees and therefore why they may have a problem finding them. Over half of the firms had formalised HRM practices in place. While the majority the small business owners were able to articulate some or all of the skills, attributes and competencies all they wanted from new employees, it was in those small firms with formalised HRM practices where there were less likely to be problems recruiting new employees with the right attitude, and were more able to delegate the HRM function to another person compared with those that did not. In terms of the debate around formality and informality of small firm HRM, the findings suggest that in these small firms formalising some or all recruitment, selection, evaluation and reward practices helped to assist them in overcoming the problem of finding the right staff. This is consistent with Mayson and Barrett’s (2006) argument that the existence of formal HRM practices indicates the small firm owner has given some conscious thought to how employees’ skills, attitudes and behaviour contribute to achieving the firm’s purpose. Despite the view that one of the great strengths of small firms is their informality and the flexibilities that flow from this, there comes a point in the growing small firms where informality can lead to diminishing returns. Wrong employment decisions can be costly for a small firm where each person’s efforts are important. Sustained competitive advantage can arise from the processes used to manage a firm’s human capital (Barney, 1991). Without those processes in a small firm one poor performer can have a significant adverse effect on the performance of others. Limitations This paper only draws on discussions with owners of 27 small businesses. These firms were all growing and their owners were willing to participate in a program to help them further develop and grow their business. These owners had been assisted through two government-funded programs to acknowledge, and take action to address, their limitations. As a result their experience may not be generalisable for all small businesses in the region. However, all the small businesses operated in the same region, with the same infrastructure and under the same local and regional economic conditions. This area has seen an increase in small business activity as a result of the continued restructuring of its main, traditional industries over the last ten years. No formal questionnaires were used; however the same two interviewers interviewed all the owners of the 27 firms at different times during 2003-2004. This allowed for in-depth, but largely unstructured interviews, where the two participating researchers could revisit topics and issues in their visits. However, the data represents a single snap shot of the participating small firms over the 2003-2004 time period. Implications for researchers Research has shown that there is a positive relationship between small firm growth and the formalisation of HRM policies. Despite this, the common finding in most studies of small business HRM is of informality. Hornsby and Kuratko (2003) suggest that managerial incompetence in handling HRM issues is a major source of firm failure. In this paper we have pointed to the issue of managerial capacity and research needs to further unbundle this issue so that it may be better understood and rectified. Implications for small business advisers Recognising the importance of HRM to the firm’s performance is part of overcoming the managerial capacity problem but our experience from this project taught us that small business owners’ need to be reminded about HRM issues. This is consistent with those studies that show the other organisational systems are put in place or delegated prior to HRM issues (see for example, Ardichvili et al., 1998; McEvoy, 1984). This suggests a critical role for small business advisers and that is to show, not tell, small business owners what to do. Training programs for small business owners and managers are critical to help them gain the skills needed to work out how they can ensure their staffing “wish list” is based on objective business needs and will assist with the continued growth of their business. Showing employers how to construct a job description and teaching them effective interview skills will help them to find the people they want in their business. Templates can be very effective in assisting small business owners formalise all aspects of HRM, not only as they relate to their current business situation but also for where they want to be in a longer time frame. Small business owners also need to be reminded to extend their horizons. Reliance on local labour markets can exacerbate difficulties of finding appropriate employees particularly for non-metropolitan based small firms. A small business mentoring program can enable learning through making sense of other’s experience and therefore is a form of training where the value can be clearly seen in terms of having some direct impact on the owner’s current situation. Mentoring can also address the lack of time and resources many small business people experience. A trusted mentor can ask the questions that can encourage the small business owner to think strategically. A mentor can be a sounding board for ideas, provide insight on actions and feedback on plans or progress towards the formalisation of HRM practices. Implications for small business owners Gibb and Scott (1985) argue that the strategic awareness and personal commitment of the owner contributes to goal achievement in firms that seek to expand their markets. To grow their business, small business owners in this study acknowledged that they must be strategic and committed to achieving their goals. They must delegate some roles and responsibilities to others and there are increasing pressures on them to do so. Unfortunately, many are reluctant to do this, as they perceive it as a loss of personal control over the key activity in their business. This is unfortunate, given Scase’s (1995) argument that those small firm owners who are unable to change their style act as a barrier to firm growth. Business owners need to allocate time to consider the implications for HRM that flow from their strategic plan. They therefore must ensure they have this overall strategic plan for their business. While some owners may not wish to share the details of their strategic plan with their staff, it does act as the point from which they can start the process of formalising systems where that means HRM policies and procedures are written down, regularly applied and guaranteed to be used. Moreover, once business owners start formalising their HRM practices, it is better that they complete the process. Delegation of HRM is most likely only going to be successful when the procedures and policies have been written down and formalised. In conclusion, the data in this paper suggests that where firms had formalised HRM practices they were able to better search for and find the skills, attributes and competencies required from new employees. Some benefit did accrue from the development of formal HRM practices and we have suggested some ways in which the message about being strategic can be delivered to, and heard by small firm owners. This is important as small firm owners, in the absence of knowledge about the benefits of a more strategic approach to HRM, are likely to opt for the short term, cost effective solution to their current HRM problems. 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