10 Main Issues in Human Resource Strategy and the 6-Step HR Success Model for SMEs


Peter: Good morning, Jan. This month we are discussing our support measures for portfolio companies in the area of people and organization. We encounter different challenges and notice different stages of development in the companies. Based on your observations, you have developed a 6-stage maturity model. Can you explain this model and what it means for us today?

Jan: Our 6-stage model structures the observations from our due diligences to develop a uniform understanding of the status quo. Level zero shows no dedicated HR department, with HR tasks often taken on by founders or assistants. Level five represents a comprehensive HR department as the core of value creation. Most of the companies reviewed are between level zero and two, usually closer to one, which puts our focus on People Value Creation.

HR Impact & Maturity Model

Level 0

  • Lack of structures, strategy, systems, governance and dedicated team in HR (0-1 FTE) most basic HR products via service providers (payroll/contracts/recruiting) or managers.

Level 1

  • Administrative and basic process-oriented HR, little structure, without strategic ambition and specialized team (0.5-2 FTE); unclear demarcation between HR and managers, simply defined HR products available (payroll accounting, contract management, recruiting).

Level 2

  • Basic HR functioning as a silo with incipient specialization (1-3 FTE); conscious handling of (labor) legal risks; incipient automation and use of HR systems; expanded HR product range; still significant dependence on external service providers.

Level 3

  • HR as a functional but non-strategic unit with a focus on efficient but reactive implementation of HR processes; team specializations (3-7 FTE); advanced integration of software as well as well-established governance structures and HR products; continued use of external service providers for specialized tasks.

Level 4

  • HR as a strategic partner; close link between HR and corporate strategy;
    Highly specialized team (4-15 FTE); automated HR system landscape; governance structure that positively influences the culture and expanded range of HR products; only limited use of service providers for highly specialized tasks.

Level 5

  • Full integration of HR into business model and operations; HR strategies & budget as an integral part of business strategy; highly specialized team (over 8 FTE); strong executive presence; innovative and leading HR technology; governance as codification of lived practice; leading portfolio of HR products; almost complete independence from external service providers, focus on internal innovation and pioneering work in HR.

Challenge: Establishing a 'Stage-Appropriate' HR Function – What Fits Our Company Stage?

Peter: Today we are focusing on ten challenges relating to HR functions in companies. The first challenge is to identify the current stage of a company in the six-stage model and to select the appropriate measures. What aspects do you look at in an initial assessment to determine which stage a portfolio company is at?

Jan: Our model ranges from level zero to five, but not every company has to reach level five. Level five is suitable for very large companies with an appropriate business situation. Simple requirements such as personnel lists often provide information about a company’s stage of development. Missing or unsystematic lists and the quality of employment contracts, such as outdated contracts issued in Deutschmarks, are not necessarily negative, but indicate a need to catch up in terms of updating.

Peter: My experience shows that entrepreneurs who have built up their company themselves often underestimate the importance of the HR function, thinking that job advertisements and payroll accounting are enough. The challenge lies in anchoring the importance of HR in the company, especially among managers. How do you tackle these challenges?

Jan: It is often discussed in the HR community that smaller companies up to a size of 30 to 50 employees can manage without a formal HR function, as founders often take on HR tasks themselves. Formalization becomes necessary when the company grows and the informal system reaches its limits, typically from 80 employees onwards. At this point, especially with buy & build strategies, the introduction of an HR department is recommended to meet the increased requirements.

Challenge: Effectively Linking HR Strategy with Corporate Strategy – How Can Integration Be Achieved?

Peter: As soon as awareness of HR arises, people quickly ask how HR fits into the corporate strategy. The second challenge is to determine the status quo and to consider the benefits and a sensible approach. How do you see this and how do you develop strategies?

Jan: It is important to recognize at which stage of the maturity model a company is, e.g. stage zero without personnel lists and with outdated contracts. The aim is to move up to level one or two, where you have basic systems and an overview of legal challenges. This requires the introduction of digital personnel files and time recording as well as a compliance-driven strategy. But there’s more to consider. Recruiting is becoming increasingly difficult; the so-called “post and pray” no longer works. Recruiting is a bit like dating: it can go well, but the real challenge is to maintain a long-term relationship, i.e. employee retention. This makes it clear that it goes far beyond having solid employment contracts and systems in place and requires a more comprehensive strategy.

Challenge: Effective Talent Acquisition Beyond 'Post and Pray' – How Do I Attract Employees Despite Low Visibility or Budgets?

Peter: The third challenge is how to become an attractive employee at a lesser-known company. Especially for smaller companies in rural areas, this is more difficult than for well-known brands in cities. You talked about “post and pray” when recruiting talent. How can you be attractive to talent, even without a strong brand?

Jan: The important question is: Who am I? This is key for smaller companies, especially in competitive markets. If you are competing for talent in the same market, you must be clear about what makes your company stand out. Even though we may not be as big, have the same brand recognition or be able to offer the same salary, there are still attractive aspects that we can offer. My team member Christoph Oesterheld uses the term “boutique hotel” to describe our recruiting concept, which is based on a personal touch and direct contact, as opposed to the impersonal processes of large corporations. Imagine being able to apply for a job at Amazon in Munich and having to go through a long, error-prone online form, or simply sending your CV to an email address provided on the website and being called back within half a day or even contacted via WhatsApp. It’s very direct, personal and offers a completely different experience.

Challenge: New Work and Home Office – How Do I Establish a Modern Yet Performance-Oriented Corporate Culture?

Peter: Speed and personality in recruiting are crucial. Efficient and individual processes are important, and even small adjustments can have a big impact. The topic of New Work and working from home has become particularly relevant for SMEs and smaller companies. How do you stay modern, establish a performance-oriented culture and successfully overcome these challenges?

Jan: In recruiting and beyond, it is important to give employees a deeper meaning to their work. This can be achieved through transparent communication, especially in small companies, whereas it can be more difficult to emphasize individual contributions in large corporations. Small companies are also more flexible in implementing new practices, such as opening up to remote working, without complex coordination processes. For example, if you can’t find a developer near Munich, you can decide to expand your talent pool and open up to remote work. You simply try to hire someone remotely without long coordination processes. Such pilot projects are of course complex and can change the corporate culture. For example, if you are used to sitting together in informal team meetings, you may have to rethink such practices. But it is feasible to anchor these new approaches in the culture, and we also support companies in this.

Peter: In our work, we see two models: traditional office-based companies and fully remote companies that operate internationally. Many young people want the flexibility to work globally, but such companies often encounter significant challenges after two to three years. Could you elaborate on the legal and cultural challenges? It turns out that remote working is more complex than it first appears.

Jan: What we often refer to as working from home falls under mobile working. In a real home office, the employer would have to equip the home workplace and ensure occupational safety, including a right of access. Most people therefore prefer the flexible solution of mobile working, which is also specified in guidelines, for example, to avoid working in public cafés. Mobile working is easily possible within Germany and is firmly established in many companies.

A cultural turning point is the two-day rule for working from home, which makes face-to-face meetings possible. The challenge begins with three days of working from home, as there is then a risk of teams physically losing sight of each other.

With hybrid working, you have to find ways to promote cohesion, for example through regular face-to-face meetings. Young employees who value flexibility are particularly affected by the social aspects of working from home. The lack of structure in many jobs also makes remote learning more difficult, which works better when knowledge is passed on in person. This is particularly important for young employees in order to achieve a certain level of competence before remote working becomes effective. Although this increases flexibility on the labor market, it also increases management complexity.

Challenge: Technology and Digitalization in HR – How Do I Implement an HRIS with a Limited Budget and Effort?

Peter: Complexity is central to the transition to remote working, exacerbated by the rapid adaptation to the corona pandemic and the necessary digitalization of HR processes. We strive to accelerate the digitalization process in the companies we support by introducing suitable systems and technologies. The challenge is to implement these systems efficiently and cost-effectively without investing heavily in processes and implementation costs.

Jan: Yes, the keyword is the digital personnel file, which has been haunting the German people and HR landscape for 20 years. We recognize its importance and are going one step further by introducing Personio, a central personnel information system that simplifies onboarding, offboarding and the creation of employment references. This supports portfolio companies efficiently, especially in the organization of employee data. The system serves as a “single source of truth” for secure and privacy-compliant data storage and becomes the core of all HR processes, from attendance management to payroll, and provides a simple overview of costs.

Peter: Is there a rule of thumb for the duration, cost per employee and investment required when implementing HR systems?

Jan: The implementation period depends on the starting point: with existing documentation and works council support, the changeover can be made within two weeks, with a subsequent acclimatization period of one to two months. It is advisable to carry out such changes either at the end of the calendar year or every six months, in coordination with vacation planning and similar matters. Costs for such systems often range between 10 and 20 euros per user per month and offer a quick return on investment through more efficient processes. One example of this is the onboarding workflow: new starters who do not yet have an e-mail address or laptop can be avoided in this way. The system consistently reminds the relevant departments to prevent such delays.

Challenge: Compliance and Legal Requirements – How Do I Navigate Through the Ever-Changing Legal Landscape in HR?

Peter: We have already touched on legal aspects several times. This is the sixth challenge I would like to address. With frequent changes in employment law, how can smaller companies stay up-to-date and overcome challenges without an in-house legal team?

Jan: Yes, without the support of an organization like FLEX, it really is difficult, because you often only work with a payroll office or tax consultant. If they are well informed, they keep you up to date with changes. But a lot is happening in HR now. For example, the written form requirement has been redefined so that everything must now be recorded in writing, including core working hours and job descriptions, which many do not comply with. Germany also has to implement an EU directive on working time recording, which requires further adjustments. Regarding the home or mobile work directive, I have limited myself to Germany. However, if you are planning to send someone to Bali for two months, there are many other aspects to consider, such as tax and social security law and other areas of law, which can quickly complicate the situation. We offer guidance and provide templates to minimize effort and avoid legal problems.

Challenge: Change Management – How Do I Initiate Necessary Changes That Also Affect the Employees?

Peter: One topic that I come across time and again is change. When we invest, it initially means a change for the companies we invest in, especially for those that were bootstrapped by the founders and suddenly have an investor at their side. That is the first change. A second change often occurs when we pursue a platform strategy and acquire another company. Then suddenly two teams have to work together that may have previously existed in parallel. Sometimes they live side by side, sometimes we integrate them more closely. This means that employees notice the changes and must adapt and accept them, which must be communicated. This is often a sticking point, especially when it happens for the first time. How do we deal with it? What is our contribution and what challenges do we face?

Peter: Change is a constant challenge, especially after investing in bootstrapped companies or acquiring other companies, which requires two previously separate teams to work together. This means that employees notice the changes and have to adapt. These adjustments must be communicated to gain acceptance. How do we manage these changes and what strategies do we pursue?

Jan: We distinguish between two customer groups: Decision-makers who want to understand and implement change, and those who underestimate change. Our task is to use change management and communication to pick everyone up and guide them through the change process, which ranges from shock to acceptance. There is a typical progression curve for change processes that begins with shock, followed by a phase of rejection, often referred to as the “valley of tears”, until acceptance finally occurs. The decision-makers, such as the founder who is selling the company, have already gone through this process. Employees, on the other hand, are often still at the beginning of this curve. It is our job to bridge this delta and support them through targeted communication. In the “valley of tears”, employees might otherwise ask themselves whether they are happy at all and whether it isn’t time to leave, which would be unfavorable for us, as we are buying the company primarily because of the qualified employees. We support managers with questions such as “Why are we changing?” and “What’s in it for me?” in order to promote acceptance and ensure that changes are received positively.

Challenge: Leadership Development & Delegation – How Do I Effectively Delegate Responsibility and Promote My Leaders?

Peter: Entrepreneurs need to reflect on what this means for their employees during the due diligence process and subsequent changes. It is important to recognize and communicate the positive aspects of an investment. A critical point is often reaching a headcount of around 80, which requires restructuring and the introduction of a second level of management. The challenge lies in delegating responsibility effectively and developing the team under new leadership. What are your observations on this?

Jan: I like to use figurative language and often describe smaller, owner- or founder-managed companies as a solar system in which the sun – i.e. the manager – directs its rays directly onto all the planets, i.e. the employees. We often see that in such companies, formally speaking, perhaps 70 to 80 people report directly to a single person, with only very tentative approaches to delegation and leadership by others. Of course, this can also be overwhelming for the managers themselves, but that is how it has grown. We now face two challenges: being able to give and being able to accept. We are trying to address these two levels. If the founders or owners want to stay on, we build up a second management level with them. If they want to sell and leave, we are looking for new managers who can take over. But replacing the role of a founder or owner with a single person is usually only possible with three or four people, because taking over the established structures and responsibilities of one person is a huge challenge. We quickly come up against the issue of delegation, even within existing teams. Teaching someone who has perhaps been with the company for 20 years and has always communicated directly with the owner to now take responsibility for a team, for vacation and salary matters, represents a major change – both for the company and for the person themselves.

Challenge: Compensation & Benefits – How Do I Design an Attractive Total Package to Adequately Compensate My Employees?

Peter: Many people think that, apart from recruiting, people management mainly revolves around payroll accounting. But we have also given this a lot of thought. Could you elaborate on how to create an attractive overall package for every employee?

Jan: Yes, the technical term for this is “total compensation”, i.e. the entire remuneration package. Many people only think of what they receive per month, which is correct, but that is only one part, namely the basic remuneration. There are often additional bonuses, which can be performance-related or based on company turnover. Another important component is the so-called benefits, i.e. additional advantages. However, this only describes one side of remuneration, the transactional contract between employee and company, where money is basically exchanged for time. There is also an emotional contract, which often has more to do with the direct manager than with the company and includes aspects such as length of service, the quality of the canteen, the commute or the general quality of life. From this perspective, the topic of salary becomes much more complex, but also more enriching. We strive to consider and shape both the financial and emotional levels by checking whether the package is in line with the market and whether it can be optimized from a tax perspective. Owner-managed companies often tend to have simple salary structures such as a fixed salary plus bonus. However, with a little more thought, other options can be considered, such as gross-to-net optimizations or equity participation in the company, which can be software-supported. These more complex aspects of remuneration are particularly exciting because they allow us to think beyond simply increasing the monthly salary. For salaries over 45,000 euros, direct increases due to taxes and levies often only result in around half of the additional net amount for the employee. Alternatives such as meal vouchers or public transport cards, on the other hand, can be passed on to the employee almost one-to-one if gross-net optimization is considered.

Challenge: Building an HR Team – What Qualifications are Crucial for My First or Second HR Position?

Peter: In view of the topics we have gone through, the question arises as to where to start in people management and the first steps and team members required. How do you proceed? Who do I need first in the people management team? How would you think about this?

Jan: A good question with a simple and complex answer. As we have already covered most of the topics, I tend to explain them in more detail. First, you should be clear about what stage you are at – phase zero or perhaps already at two or three. Based on this, the link between corporate and HR strategy is crucial. Let’s imagine that I manage an organization with 50 people and plan to integrate two other organizations without their own HR departments and hire an additional 20 new employees. This decision determines which competencies are required. At the beginning there is often the topic of people operations, i.e. the administrative area, project management and talent acquisition or recruiting. It makes sense to hire a somewhat more experienced person with a background in employment law who can also work in recruiting if necessary. This is often a generalist position that can cover these different areas. If the strategy allows for a second person to be hired, it makes sense to differentiate in recruiting: One person focuses on talent acquisition and engagement, while the other is involved in people operations and projects.

Peter: Referring to the model, is it necessary for every company to aim for the highest level, or is it enough to stay at a lower level like two or three if it is suitable for the size of the company?

Jan: This question was also on my mind during my own process. Initially, as a passionate HR person, I naturally thought that the target always had to be a five. But I realized that you have to reach at least level two or three, because otherwise you don’t have a clear idea of who works in the company and basic compliance and standard processes don’t work. Up to level two or three, it’s a must in most cases. Anything beyond that, where we are talking about more complex HR products, I see as optional. There are many successful companies that do nothing beyond that. Would they perhaps be in an even better position if they did? In part, yes, but to be specific: A 360-degree feedback process that is software-supported is one such product that is only successful with and through the employees. The management level must support this, as must the next level down. I would therefore say that from level three onwards, you have to check very carefully: Am I doing this as an end or is there a real business case for it? And it’s crucial to have advocates in the company, ideally at management level, who support these measures, because otherwise they usually don’t work.

Peter: Perfect! Thank you very much for that, Jan.

Jan: Thank you very much, Peter.

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