Evolving Organizations

Size Determines Complexity

Size doesn't matter, the saying goes. Yet, this is not true for biological systems, and neither it is for social organisms – tribes, nations, civilizations, and even corporations.

The size of the organization determines some very tangible aspects, like structure, budgets, processes, and allocation of power and influence. Moreover, size shapes many intangible aspects, like communication, trust, culture, values, and even identity. As an organization evolves from a bootstrapped one-person show to a tightly-knit like-minded team, and then to a larger enterprise – it is inevitable that along the way their ways of working and needs will change. At different stages of development these needs will be different. These stages will depend as much on the nature of the business as they will on the size of the organization. Size determines complexity, and complexity comes with new challenges and problems that have not existed before. On the backdrop of this increasing complexity the HR function can be an invaluable partner to the business – if introduced and treated properly.

Evolving for Abuse

At the first stage of development, small companies of up to 100-150 associates can run mostly without HR. With the exception of specialized processes, like payroll and labor law compliance that can be sourced externally, it is the leadership team, in such cases, which takes on the de facto role of the HR function. In addition to their daily business, the team leads take on the complete responsibility for recruitment, trainings, market compensation research, people care, employee cases, etc. Everyone knows everyone – by first name, last name, and life journey. Close bonds and relationships, often beyond the professional setting, develop between team members, and between team members and their leaders. The culture feels like a clan, a brotherhood. Cases of attrition are felt almost like a personal loss. Solid interpersonal relationships are prerequisite to get things done. Speed, efficiency and pragmatism often overrule even the few established processes. The organization is easy to comprehend – there are well-known experts and go-to persons for every topic. Communication flow is informal. News, rumors and mood swings spread like wildfire. In such a setting the leadership team might still have enough time, emotional and cognitive capacity to tend to each and every aspect of the organization – the social landscape is still roughly within the ballpark of the Dunbar's number.

Growing the organization further into the hundreds we reach the second stage of development by informally crossing a transformational threshold. You can barely put a finger on it as you go – it often comes gradually, slowly, but is easily seen in hindsight. As the business grows so does the need for more people. That often necessitates restructuring to keep team sizes manageable. New leaders join the organization – without all of that "clan background", bringing in new practices from the outside. Teams are reshuffled and there is an increasing interpersonal disconnect due to the sheer size of the organization. New functions and roles are introduced. The amount, variety and nature of information increases exponentially. Even small obstructions, which were previously handled swiftly and directly by the leaders, are now slowing down the organization significantly. The stakeholder map grows so much that decisions become notably more complex to take and communicate. New, more formal and well-documented processes and practices are introduced to allow for a more decentralized decision-making based on common ground and guardrails. The organization starts to feels more "corporate" and process-driven, rather than purpose-driven. The leadership team must tend more and more to the primary business objectives and has less and less time for people and organizational care.

Overwhelmed, for many organizations this becomes a trigger point to introduce the HR function – to "offload non-business topics" from the shoulders of the leadership team. And it is at this point that the disconnect between the business and its people is created: when leaders are assigned the mission to only take care of the business, and the HR is assigned the mission to only take care of the people.?

What happens next should not be a surprise. The newly formed HR team tries to fit into the existing corporate culture and evolve the established behavioral practices into a more systematic approach. Painstaking, multi-year efforts are launched to standardize core HR processes like recruitment, onboarding, training, career development... There is an organic resistance to change, little understanding why any kind of change is needed, and even less trust that these "newcomers" are truly needed. After all, the organization has thrived so well so far without them, no?

While the HR team is trying to prove their value with the associates on the one side, it struggles to build trust and jointly shape the way forward with the leadership team on the other. The leaders fall back to old behaviors and solo actions based on deep prior connections with the team members. The board conducts all major discussions behind closed doors, and only kindly informs the HR about the outcome, which they now need to diligently implement - often without context or room to maneuver. HR is seen as a mere executor of board decisions - some of which short-sighted and dubious, which earns HR a bad rap. It may take several years or even several rotations of the leadership and HR teams to get out of this vicious circle – the collective memory is not easily erased. Taking notice that after so much time and effort spent the results are at best on par with the rest of the industry, the executive management settles down and stops investing into HR - treating them as cost, non-productive, admin, and myriad other terms, which simply mean: first to dispose of when cost-cutting.?

What is fascinating, is that this whole journey has been traveled with the best intentions. Yet, it was embarked on with short-sightedness and navigated without a map.

Evolving for Use

Forming a strong bond between the HR team and the founders and leaders of the organization is key. The earlier this happens - the higher the efficiency of the HR function, and of the entire organization. Early founders have plenty on their plate: polishing the business idea, validating the product-market fit, fundraising, business incorporation and shareholder setup, attraction of key talents and players, closing the first deals, delivering first product increments as fast as possible - to name just a few. It is only natural that their focus lies a few months or a year ahead, at best. Long-term organizational development is rarely a priority when you are trying to survive and show positive results to your shareholders.?

When the organization grows over a dozen associates, hiring an HR Manager may offload the leaders from operational tasks related to HR administration, payroll and labor law. Even when those are mostly outsourced, interactions and content discussions with the external provider require time and focus. There are several benefits to introducing the HR function early:

• It frees up time and cognitive capacity for the leadership team to work on stabilizing and growing the business
• It ensures that all time-sensitive HR topics (like paying salaries in time, resolving grievances, handling exits, etc.) are handled in a predictable and structured manner, and do not depend on the benevolence and availability of the leadership team, which might be on a sales roadshow overseas, for example.
• It ensures the organizational acceptance of the HR function early on, and lays the foundation for its understanding.

After the mission-critical processes have been set up to run like clockwork, we can continue expanding the HR footprint into more strategic topics. To be truly successful, the HR team must gain a solid understanding of the business, opportunities and challenges ahead. It is therefore vital that the Head of HR is part of all board meetings and contributes to the strategy development - even if it requires of them becoming more expert and more business-savvy. High quality decisions with long-term organizational, structural or people impact can only be truly reached in partnership with the HR.?

As they grow further, most organizations adopt a layered management structure, having at least two layers - "the board" (founders, C-suite, etc.) and "the leadership team" (team leads, department heads, directors, etc.). Far before having reached such size and complexity, it is only advisable that HR Business Partners truly become part of "the leadership team". By strengthening their interaction with other leaders on a daily basis, understanding their business challenges, team challenges, even personal challenges - they become part of the "inner circle" of leadership, and a trusted advisor on all matters. The potential of HR BPs is often highly underestimated. Yet, being close to both the leadership team and the associates - they can be a powerful influencer and multiplier of the organizational culture. It is through the attitude, tone, and quality of communication between the leaders, HR BPs and associates, that the corporate culture is being formed on a daily basis. It is through their joint work and alignment that associates can be successfully supported in their professional development, challenges, and contributions.?

As companies outgrow their homebase and reach out to new markets, subsidiaries, sales and R&D offices are being established in other countries. Internationalization of the company unravels, and people of different ethnicities and corporate cultures start joining the organization. Whether that happens on a greenfield or by means of acquisition, there is an obvious challenge of dealing with diversity in the broadest sense. A well-developed HR function can be instrumental in "adopting" the newcomers by adjusting cross-cultural communication and supporting mutual understanding of different values systems and norms. Furthermore, it becomes a key driver of global strategic workforce planning and global talent development. The former allows businesses to tap into the best talent at best cost and best locations matching their business needs. The latter provides associates across the globe fascinating opportunities for professional growth, development and relocation. More broadly, HR nourishes the "talent garden", including global leadership and executive succession planning. And with the right talent onboard - any organization can transform and thrive.

In the upcoming articles we will look deeper into specific aspects of the HR function and how they can run to detriment or to benefit of the organization - depending on the leadership mindset, values and culture.

Coming up: Payroll - Clocks & Crafts

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