HRM in Small Firms: Respecting and Regulating Informality

Paul Edwards and Monder Ram

INTRODUCTION
EXTENT AND MEANING OF PRACTICES
UNDERSTANDING MANAGEMENT PROCESSES
UNDERSTANDING EMPLOYEE EXPECTATIONS AND RESPONSES
INFLUENCES ON PRACTICE
CONCLUSION
NOTES
ENTRY CITATION

INTRODUCTION
Writing an account of HRM in small and medium sized firms (SMEs) is either an easy
or a virtually impossible task. It is easy in so far as it is possible to list a series of
ways in which SMEs differ from large firms. They are less likely to employ HR
specialists, much less likely to negotiate with trade unions, more likely to rely on
informal recruitment and appraisal practices, and so on. There is also evidence that
such facts are common across many countries. Large firms are strongly shaped by
their national environments so that, for example, formal employee representation is
taken for granted in Germany and Scandinavia in ways which American managers
may find it hard to understand (Wever, 1995). In small firms, such formal institutional
effects are weaker, and informality is much more common (Ram, 1994; Cooke,
2005).
The task becomes difficult once one moves beyond such facts to take account of some
complexities in relation to what they mean.

Throughout the industrialized economies, about 97 per cent of firms are

small (that is, employ fewer than 50 people), and a spot estimate of how on
average they differ from large organizations will conceal a wide range of
variation. How can this variation be captured? Studies continue to eschew
explanation. To take one example, a study of research on management
development treats small firms as a homogeneous category; though it notes
that development needs differ, it offers no way of grasping in just what
respects firms differ and with what consequences (Fuller-Love, 2006).
Facts need explanations and, as we will see, once one moves beyond
straightforward facts such as the absence of HR specialists the significance of
facts can become controversial. Thus one clear fact is that strikes are rare in
small firms. This famously led some observers in the past to equate the
absence of strikes with a lack of conflict and to search for an explanation of
presumed harmony before the existence of such harmony had been
demonstrated (for example, Ingham, 1970).

Following on from this point, the fact that small firms differ from large ones
does not establish whether the difference is due to size or to some other
feature; and if size is a causal factor we then need some explanation of this
effect.
Underlying these issues is a deeper one of research evidence. A great deal is
written on small firms, and there are several academic journals focused on
them. But, first, attention to HRM specifically is sporadic, as illustrated by the
fact that some journals have felt the need for special issues on the topic.
Second, the literature reflected in these issues tends towards the generation of
basic facts on the lines listed above. Third, and most important, is the
analytical starting point. Much small-firms research has not adopted a
perspective - now common in mainstream HRM (especially Boxall and
Purcell, 2003) - in which the firm is seen as an organization comprising groups
with differing interests in which power and conflict are central. Employee
interests continue to be relatively neglected. In 1990, Curran complained of a
lack of attention to real people in real enterprises and the complex ways in
which the small scale sector is integrated into the economy (1990:139). This
complaint still has force.

It is true that an important strand of writing has taken a critical view of the nature of
the employment relationship in small firms, clearly exploding the myth of harmony
and shared purpose (Goss, 1988; Rainnie, 1989). 1 Yet this can simply invert the
received wisdom. Two experienced writers state that the reality
can be very different [from harmony]. [E]mployment relations in SMEs [are] more
akin to a black hole or bleak house, characterised by poor conditions of
employment, low pay, the absence of good (or any) personnel practices and
enforced compliance rather than active employee commitment (Blyton and Turnbull,
2004: 288, emphasis added).
Apart from the get-out clause of can be, this statement paints a very bleak picture.
The present discussion shares with the critical view an effort to dig beneath the
surface so as to understand practice and the meanings of work. But an application of
this view means grasping the complexities of compliance and consent, rather than
replacing one simple image with another. That said, it is true that the black hole image
applies to some small firms, namely, those in low value-added and extremely
intensive sectors of the economy though even here the situation is far more complex
than the idea of enforced compliance can grasp (Edwards and Ram, 2006). Note also
that this idea has at least as much application to large firms as to small ones, for
example in relation to intensive control in call centres and cultural control which can
generate intense expectations on employees and dissolve work-home boundaries
(Taylor et al., 2002). Indeed, large firms are probably more systematic and calculated
in such forms of control than are small ones, and to that extent small firms may leave
employees with greater room for discretion.
As to what is small, some studies include organizations with as many as 500
employees. Others flag the importance of small firms, but in fact say little about them;
Ackroyd (2002), for example, identifies them in a chapter title but devotes only two
pages to relevant issues, which in any event cover mainly firms with up to 300
employees. Firms with as many as 300 employees are likely to have many standard

HR practices in place, and our focus is thus on the more specifically small firm. A
rough indication of the importance of small firms comes from official UK and US
statistics which give the distribution of private sector employment in 2005, as in Table
31.1 (SBS, 2006; BLS, 2005).
These two countries are among those where SMEs account for the smallest proportion
of total employment. Estimates in countries such as Greece and Spain put SME
employment (that is, within firms with 1249 employees) at about 80 per cent of the
total; and given the very large and often poorly measured informal sectors in these
countries the true figure may be higher (EIRO, 2006).
Table 31.1 The distribution of private sector employment in 2005
UK USA
Smallfirms (049 employees)
47% 30%
Medium-sized firms (50249 employees)
12% 19%
Large firms (250 employees or more)
41% 51%
Our focus is mainly on small firms, which, as the figures in Table 31.1 show,
account for the bulk of SME employment; we would see a firm with up to 100
employees as tending to be small in the more substantive sense of lacking formal
hierarchies and procedures. Note also that accounts like Ackroyd's, which focus on
medium-sized firms, in fact cover only a minority of employees. We use evidence that
does not always follow our restrictions, and we note where relevant the category of
firms studied.
What is regarded as a small firm in a specific industrial sector depends on the relative
size of other firms in the same sector. Official figures show that small firms account
for 75 per cent of private sector employment in construction but only 15 per cent in
financial intermediation (banking and the like). A manufacturing firm with 80
employees would be considered small, whereas in large parts of the service sector
such as consultancy, software and the media and creative industries, a firm with this
many employees would be considered large. There is no ready resolution of this issue.
We touch on it below, for example in commenting on how HR practices change as a
firm grows. Otherwise, our approach is to address firms that lack formal HR practice
a condition that will affect those that might in fact be large within their own
sectors.
A final opening comment is that we approach the issue through the eyes of the HR
professional. That is, one could write generally about HR issues in small firms: how
do their pay and conditions differ from the situation in largefirms, are they as
harmonious as is often claimed, and so on? We draw on such writing, but our central
question is: how can the HR professional, armed with the toolkit of formal
procedures, grasp HR practice in the small firm, and what if anything might be the
distinct HR contribution in such a firm?

EXTENT AND MEANING OF HR PRACTICES

We used above the shorthand that small firms lack formal HR systems. A more
accurate statement is that such systems are rare compared to the situation in large
firms but far from absent, and also that they vary in their extent.
The UK is a good place to establish this statement, since it has a series of Workplace
Employment Relations Surveys (WERS) that measure employment practice, the most
recent of which in 2004 embraced workplaces with as few as five employees. The
1998 Survey looked at what it called small businesses, defined as workplaces that had
10-99 employees and were not part of larger companies. It found a degree of
formality; for example, 70 per cent had a formal disciplinary and dismissals procedure
(Cully et al., 1999: 263). European evidence offers a similar picture. A study of
management development across seven countries found that, though formal written
policies were rare they were not absent, being reported by 29 per cent of small (20100 employees) firms; moreover, around half of small firms had a training budget. It
also makes the point, echoing a long tradition of workplace studies (Terry, 1977), that
informality is not the sole preserve of the small firm, and that large ones can often slip
from their own rules. We comment on this theme in the conclusion.
The evidence was taken further by the 2004 WERS, which looked specifically at
contrasts between small and large companies (Forth et al., 2006). A summary of
indices of formal HR processes and strategies is given in Table 31.2.
Several points stand out from the table.

Family ownership is an important characteristic of small firms; this is

addressed below.
Workplaces owned by small firms are indeed relatively non-formalized. The
table has several indicators of formality. The respondent to the survey was the
manager with primary responsibility for HR matters; spending a significant
amount of time on HR and having a formal qualification were both associated
with size. Other indices of formality are positively associated with size, such
as having some kind of formal strategic plan (which need not necessarily
embrace HR plans). This seems to be a cross-national fact, as studies in the US
(Kaman et al., 2001), Australia (Kotey and Slade, 2005), and Canada (Golhar
and Deshpande, 1997) suggest.
Some practices, such as communication with staff, as well as existence of
discipline procedures, are widely established in small firms. And a third have
formal equal opportunities policies. Formality is far from absent.
Traditional industrial relations are very rare in small workplaces. Collective
bargaining coverage is virtually zero, and other figures show low trade union
membership. Related to this, pay setting is a workplace responsibility; not
only is there little reliance on collective bargaining but there is also by
definition no higher level of management to take on the responsibility. Unlike
in large firms, where national or industry agreements operate, or a company
has a formal pay structure that is then implemented at workplace level, in
small firms pay setting takes place at the workplace with hardly any direct
external rules as to how it should be conducted.

Further research by the writers has addressed this point (Storey et al., 2009). It
produced an overall formality index, and found that it varied by both workplace and
company size. That is, small independent workplaces are the most informal. But
larger independent workplaces retain a considerable degree of informality. Small
workplaces owned by large companies often have considerable formality.
What lies behind this picture? At one extreme, some writers see small firms as
behaving in much the same way as large ones. Way (2002) reports a US survey of
high performance work systems, embracing such things as self-directed teams and
job rotation, group-based performance pay, and formal training. He finds that the
extent of these systems did not differ between small and large firms. He also argued
that their role was similar in that they were correlated with measures of performance
in much the same way as was the case in studies of large firms (such as Huselid,
1995). A survey of US service sector firms also finds more extensive use of high
commitment than of bureaucratic practices, and reports that the former were
common across all sizes of firm: small firms can no longer be considered
unsophisticated practitioners of human resource management (Kaman et al., 2001:
43).
The data used by Way (2002) and Kaman et al. (2001) come, however, from self
reports by managers to telephone surveys, and there was no space to assess what the
respondents meant. Some items are almost bound to be high in small organizations.
Job rotation, that is the sharing of tasks, is most likely where there is no formal
structure of jobs and where, as in small organizations, employees need to take ona
range of duties. 2 Similarly, any small organization may be a team in the sense that
workers work together. It will not be a team in the sense of the (large firm) literature
on teams, which speaks of the ability of teams to allocate tasks among themselves and
the election of team leaders. This is the image of an organization with a developed
division of labour, in which team work as a mode of work organization replaces some
more Taylorized system (Edwards et al., 2002). In small firms, such a division of
labour does not exist, and a team has a different meaning. As Bacon et al. (1998:
262) note ironically in a study stressing the extent of formal practices in small firms

 teamworking is not about creating formal work groups but maintaining the notion
of all working together. 3
Other items, too, will mean different things. Formal training can mean almost any
kind of training, including very basic induction. The UK WERS, which specified that
formal meant off the job training, reports relatively low levels in small firms. This
does not mean that training is absent, and some surveys have attempted to measure
informal training in SMEs albeit with the risk of inviting overestimation by
including minor on-going activities (Kitching, 1997). In short, a practice as measured
by a survey means different things in small and large organizations.
It is useful to enlarge on this point in relation to some areas of HR practice. Consider
first recruitment and selection. One image of small firms is that they rely heavily on
informal means such as personal contacts and referrals from existing employees.
WERS 2004 in fact found that informal recruitment methods were used equally by
small and large firms (Forth et al., 2006: 33). We would, however, add three points.
First, this fact says nothing about the weight placed on particular methods. Second,
actual practice may differ from what is reported in a survey. Thus Taylor (2005)
reports from four firms that, though managers claimed to use formal methods,
employees stressed being known personally and the role of kinship links. Third,
practice may vary according to the type of small firm. In relatively unsophisticated
firms in sectors such as clothing manufacture and hotels and catering, there is heavy
reliance on word of mouth methods. Though formal methods may also be reported,
these tend to be used to screen applicants, or when all else fails. What is important is
an applicant who is known to the owner and is believed to have the necessary
commitment. Technical skills may be less important than harder to define attributes
such as attitude and commitment. These tendencies are heightened where firms are
run by people from ethnic minorities, who tend to recruit from particular parts of the
labour market and for whom kinship ties are often important. Note that this is not a
fixed ethnic characteristic: minority businesses operating in, say, business services
will be much less constrained by kinship ties; white family owned firms in traditional
sectors often rely on family and friends; and it is the combination of location in a
particular market segment and background that leads to particular emphasis on
informal recruitment channels. All that said, we suspect that all small firms tend to
place a relatively large emphasis on informal methods of recruitment and even more
so when they are selecting employees who, after all, will have to work closely with
existing staff and who indeed need to fit in.
A second key area is performance appraisal. Ongoing research in three sectors food
manufacturing, ICT, and the media and creative industries is useful here in that it
covers traditional and more modern parts of the economy. 4 The extent of use of
appraisal was on a par with what would be expected from Table 31.2. Employees also
reported the presence of appraisal (with 68 per cent reporting that their performance
was appraised) and that the practice was not mere window-dressing: of those
reporting the use of appraisal the great majority reported a strong or very strong link
between how effectively they worked and their appraisal rating. Yet there was also
evidence of a lack of structure in the process. In some firms, workers were unsure
whether appraisal had in fact taken place. In most, the process was much less
formalized than one would expect in large firms, with rather little documentation or
training of appraisers. Perhaps most significantly, evaluations depended on the

judgement of managers, who may also be owners of the firm. Taylor (2005) similarly
reports for four firms that appraisal targets and associated rewards reflected close
personal interaction and were ultimately in the hands of managers. This is not to say
that the process is necessarily simply subjective or biased, and little discontent among
employees over the issue was recorded in these studies. The key point is that the
process is more personalized and informal than the term appraisal scheme tends to
convey.
A third issue is payment systems. As noted above, these are important in that it is
firm-level decisions that affect pay while formal pay structures seem to be rare. A
great deal is thus left to choice. Small firms appear to deal with this choice through
rules of thumb, which turn on what seems to be the going rate together with some idea
of what is fair. At this point, we need to be clear as to what is in the pay package.
Some observers present the small firm as a site of shared benefits between owners and
workers, as might be indexed by profit-sharing schemes or bonus arrangements. Yet
the research just mentioned found remarkably few systems of this kind, as did earlier
research on mainly low value-added firms (Arrowsmith et al., 2003). Cox (2005)
reports from a study of four relatively large (120450 employees) firms that did use
variable pay schemes that managing both the procedural and distributive aspects of
variable pay proved very difficult. In short, formality and informality interact.

UNDERSTANDING MANAGEMENT PROCESSES

The case for an integrated approach has been advanced by Wright and Boswell
(2002) in their review of mainstream HRM research, and recently by Harney and
Dundon (2006), who focus specifically on small firms. To arrest the prevailing
tendency to desegregate HRM, Wright and Boswell (2002) advocate the linking of
organizational and individual levels of analysis; and stress the importance of viewing
HR practices as part of an HR system rather than discrete entities. Harney and
Dundon (2006) suggest that an open systems perspective is best placed to capture
the complexity of HR practices in small firms. These authors stress the intersection of
external influences such as the product market and internal strategic choice in
explaining the complexity of small firm practice. Yet there is one key element absent
from their list: the familial context (Edwards and Ram, 2006; Edwards et al., 2006).
We have seen that most small firms are family owned. And many that are not family
firms are likely to bear the imprint of their founders, for example the many firms in
sectors such as bioscience that were founded as spin-offs from large firms. This was
evident in Hannan et al.'s (1995: 513) study of 100 young high technology firms; the
authors found startling diversity in founders employment models even among startup companies within the very same industry, competing directly against one another'.
Four types of employment relations were identified:

a factory model, which emphasized pecuniary attachment and managerial

control;
a commitment model based upon peer and cultural control;
a professional model that stressed attachment to work; and
an engineering model that exhibited a more instrumental approach to work
relations.

The blueprints of company founders were key to explaining the variety and
durability of these approaches.
Hence, management processes will be strongly shaped by the preferences and
assumptions of the owning group. This is not to say that there will be one common
view. In one firm that we studied there was a longstanding dispute between one
member of the owning family and another over the nature and extent of formality,
with one arguing for a more systematic approach, including the employment of an HR
professional, and the other preferring traditional family ways. The point is that purely
personal preferences, which are not necessarily right or wrong, will play a larger role
than in large firms. Gilman (2006) reports a firm that used psychometric testing
because its founder thought that the method was a good idea.
The longer term development of a firm is also likely to reflect personal choices. Some
family firms consciously choose to remain small because they like the family
atmosphere and because there is no personal ambition to develop the business. Other
rationales for remaining small include the fear that, once a firm becomes significant, it
will be the target of a take-over by a large firm. Much will depend on the personal
ambitions of owners and whether or not they wish to develop the business for the next
generation. Such ambitions, and their implications for human resource practices,
rarely attract the importance they merit in standard accounts of human resource
management in small firms. Yet they are central to an appreciation of the dynamics of
business development in small firms. Wheelock and Baines (1998a: 200), for
example, maintain that the survival, maintenance, and growth of the microbusiness
cannot be fully appreciated without developing an understanding of the relationship
within the household in which the business person is based. Aldrich and Cliff's
(2003) family embeddedeness perspective, echoes this approach in its explication of
the variety of ways in which developments in the family can influence the trajectory
of the enterprise. In detailed case studies of restaurants, Ram et al. (2001a) found that
the development of the business owed much to the dynamics of relations within the
household. Many households worked towards the survival of the family enterprise
(although there were differences between family members). Such an imperative
militated against the substantive growth of the business. However, this did not mean
that the business remained static; the key factor appeared to be the priorities of
household members at any one particular point in time. The presence of secondgeneration family members in many of the restaurants suggested a degree of
continuity. However, there were many tensions in these firms, which meant that an
uncomplicated transition from one generation to another, and smooth employment
relations between family members, could not be taken for granted. The life-course of
different family members will influence the shape and form of the small business
household. Developments in their domestic life circumstances, disenchantment with
the often-onerous nature of restaurant work, and inter-family tension militated against
unproblematic continuity of the family business.

UNDERSTANDING EMPLOYEE EXPECTATIONS

AND RESPONSES

A further piece of the jigsaw concerns what employees expect. Do they want formal
procedures, in which case an HR manager may well find formalization to be a
sensible strategy, or do they prefer informality?
A brief excursion into debates on employee attitudes will help here. Early research
worked from the facts of low strike rates and the like to argue that there was an
inherent harmony in small firms. A later reaction reversed the picture, stressing low
wages and autocracy which were attributed to the intense market positions faced by
small firms (Rainnie, 1989). The latter approach, though more realistic, shared with
the former a remarkably small evidence base in terms of employee views. A third
approach shared with the first a rather optimistic view but with the difference that
employees were not seen as inherently satisfied; instead, small-firm workers tended to
stress intrinsic aspects of the job, and satisfaction here meant that low pay was not a
major source of discontent (Ingham, 1970). A fourth view said that small-firm
workers were not inherently different from others and that size of firm was important
only in combination with other factors, so that the age of the worker and the sector in
which he or she worked was more important than size in determining attitudes
(Curran and Stanworth, 1981). The most recent evidence, from WERS 2004, returns
to the influence of size as such, in showing that on a very wide range of indicators
small-firm workers are more satisfied than their large-firm counterparts (Forth et al.,
2006). More detailed research has shown that this result holds true even when a
number of factors, including sector and workers' personal characteristics, are held
constant.
Research (see note 1) has also gone further. It has shown thaton average formality
reduces employee satisfaction in small firms but also that elements of formality have
the opposite effect. Most notably performance appraisal and equal opportunities
policies were associated with a high level of satisfaction.
Such results suggest that small-firm workers do not seek informality in any overall
sense. Moreover, a large body of research has shown that conscious self-selection,
whereby workers choose small firms for the intrinsic interest of the work, is likely to
be very unusual (Curran and Stanworth, 1979): workers generally lack the
information to make such choices, and job choice is a less rational activity than selfselection implies. It is none the less the case that workers find benefits in informality.
Workers' expectations and responses will also be conditioned by the prevailing pattern
of social relations in the workplace. Kitching's (1997) study of three contrasting
sectors: computer services, employment and secretarial services, and free houses and
restaurants identified different kinds of culture. These cultures gave meaning to
employment and to the relationship between owner-managers and employees. In
computer services, there was a work culture: job satisfaction acquired through the
content of work roles was an important feature of employment relations. This
contrasted with the more instrumentally-oriented (that is, money) culture of
employment services firms, and the predominant culture of sociability in free houses
and restaurants.
Ram's (1999) intensive case study of a small consultancy firm further illustrates this
point. Employees joined the firm because there was an opportunity to be associated
with an organisation that had a good reputation; yet there was also the scope to

develop their own particular specialisms. One consultant commented that a particular
attraction of joining the firms was that it had the advantages of shelter and cover but
none of the disadvantages of a bureaucracy (Ram, 1999: 882). In this sense, the
employing organization serves as a resource that can be used for delivering services
to the client and for enhancing personal reputation (Goffee and Scase, 1995). Others
spoke of the prospect of working with a team of peers; the exciting nature of the
work; and the choices that the firm offered. However, it is important to note that
these features redolent of collegiality autonomy and trust were not the only
inducements for joining the company. Competitive financial packages, a directorship,
or the prospect of becoming a full partner were also significant.
Or consider a striking finding from studies of relatively low-wage firms (Ram, 1994;
Moule, 1998; Holliday, 1995). One might expect that in such low-wage firms in
highly competitive industries managerial control would be very tight. In fact, a
repeated result is that time-keeping can be lax and that workers come and go with
considerable freedom. The reason for this result is that managers in small firms are
likely to know the demands of production and to be relaxed if workers go absent at
times of slack demand. The quid pro quo is that workers are often expected to work
overtime at very short notice, commonly without any overtime bonus. There is thus an
implicit bargain about work effort, and attempts to formalize the bargain could run
into difficulty.
The implications for HR are two-fold. First, workers in small firms develop shared
expectations that will shape responses to HR practice. The ways in which, say,
performance appraisal would work in Kitching's three cultures are very different.
Second, however, cultures have contradictory elements. Thus Ram found that, though
consultants enjoyed the informality of the small firm, there were also concerns about
the vagueness and secrecy of pay determination. It is moreover possible to change
cultures as firms evolve (Ram et al., 2001a). The approach to HR needs to be sensitive
to the space for change and the interests that may promote and retard it.

INFLUENCES ON HR PRACTICE
We stressed at the outset that small firms display enormous diversity. We have
presented elsewhere a formal framework that models different types of firm and
indicates how open they may be to HR practices (Edwards et al., 2006). For example,
a very small firm with strong family ownership and control may be resistant to formal
HR techniques. For present purposes, we draw on the ideas of the framework by
addressing some of the key ways in which small firms vary.

Sector
The importance of sector was underlined by the research of Curran and Stanworth
(1981), which demonstrated that workers in two sectors electronics and printing
often had more in common with large-firm workers from the same sector than with
employees of similarly sized firms in different sectors. Scott et al. (1989) developed
this approach by identifying four broad sectoral groups: traditional manufacturing, hitech manufacturing, traditional services (e.g. hotels) and hi-tech services. Further
refinement is necessary if one wishes to understand the context of a particular firm. In

the hotels and catering sector, for example, many firms comply with employment
legislation such as the UK National Minimum Wage (Arrowsmith et al., 2003). But it
is also true that there are parts of the sector where not only is legal compliance weak
but also where there is substantial use of illegal labour (Jones et al., 2006). The
reasons for this reflect pressure and opportunity: competitive pressure leads firms to
minimize on wage costs, while kinship and communal ties allow employers to recruit
co-ethnic workers who are willing to work for illegally low wages. This opportunity
structure is itself the product of wider forces in society, including the regime
governing immigration and ethnic disadvantage. The result is a labour force with no
choice but to work for low wages; firm owners are also pressed to operate in marginal
conditions, suffer insecurity, long hours and low incomes, thus sharing the misery of
their employees.
HR practices will vary according to sectoral conditions. In the extreme cases just
discussed, there are few if any formal HR systems. Recruitment is done through word
of mouth and written procedures are largely absent. Mainstream traditional firms are
more likely to have in place the basics of written procedures. What is striking about
them, however, is the rarity of pay structures: clear schemes that define what a job is
and the rewards structure attached to it (Gilman et al., 2002; Tsai et al., 2007). Indeed,
the practice of leaving pay very much at the discretion of managers has also been
observed in more advanced sectors such as the creative and media industries (Sen
Gupta et al., 2006) and also, as we will see below, software consultancies both
qualifying as high end or specifically hi-tech services. Now, the meaning of this
informality differs. In professional jobs, regardless of the size of the firm, broad job
boundaries and individual responsibility are taken for granted. In the media sector,
moreover, freelance employment is widespread and freelancers will be paid in much
the same way if they work for a major media company or as mall firmthough of
course the amounts that they earn will differ (Blair et al., 2003). In traditional firms,
the lack of a pay structure does mark out jobs from those in larger firms.
Supply chain relationships between small firms and their larger customers can also
affect the nature of HR practices. Power-dependency perspectives (Rainnie, 1989)
suggest that the domination by larger customers is such that any scope for enlightened
HR practices in small firms is severely limited. However, more optimistic assessments
tend to view this relationship as mechanism of supplier development, where the
large firm facilitates the transfer of knowledge and new work practices to the small
enterprise (Hunter etal., 1996). Bacon and Hoque (2005) offer some support for this
thesis in their finding that larger customers are associated with a higher likelihood that
the small firm will adopt a training strategy and achieve accreditation for HR
practices. But this was not accompanied by the adoption of a more widespread set of
HR measures, leading the authors to endorse Ram's (2000) finding that HR
accreditation may be little more than a procedural measure with no subsequent impact
on wider employment practices.

Family ownership and personal control

A regular finding in small business research is that the primary reason for starting a
business is personal independence. This means that a substantial number of small
firms will prefer small-scale informality and will lack explicit HR policies. Kotey and
Slade (2005) report that 36 per cent of micro (defined here as fewer than 5

employees) and 49 per cent of small (519 employees) firms had been in existence
at least ten years. These are likely to be mature businesses not seeking further growth,
and HR practice would need to reflect a desire for continued informality based on
personal relationships. Family-owned firms use fewer formal HR practices than
similarly-sized non-family firms (de Kok et al., 2006; Reid and Adams, 2001).
Family ownership is likely to exercise some clear effects, of which the most obvious
is that non-family employees may be unable to climb to the top of the firm, with
implications for career development. In some cases usually in the more traditional
and low-wage sectors the firm may be used to find jobs for members of the family,
which can close off opportunities for other employees as well as having clear
implications in that family members may lack relevant business skills and experience.
Mullholland's (1997) study of well-established family businesses in a variety of
sectors suggests that such processes are not necessarily confined to low value added
firms. Mulholland examined entrepreneurial, managerial and preservation strategies
characterizing successful (middle-class) family businesses, drawn from majority
white and minority ethnic communities. In one of these cases, owned by an ethnic
minority family, the expansion of the business coincided with the incorporation of the
founder's five siblings. Mulholland (1997: 695) argues that the employment of male
siblings is consistent with the management practices characteristic of industrial family
capitalism, providing career paths, while also safeguarding against labour market
discrimination that ethnic minorities potentially face. Such opportunities are rarely
available to non-family members and are also strongly gendered.
It should be noted that issues of insider-outsider tensions are not limited to small
firms. It is a commonplace that large Japanese MNCs tend to favour insiders
(Japanese nationals) over outsiders in fields such as promotion. The issue for an HR
manager is not so much whether or not a firm is family-owned but the importance
placed within a firm's traditions on ascriptive characteristics (membership of a
particular in-group) as opposed to achievement and merit.
A regular finding in small business research is a tension between personal control and
formal HR practices. A firm may, for example, have reached a size at which it
formalizes its procedures, but if the owner maintains detailed engagement these
practices may in effect be overridden. Gilman (2006) reports this tendency
significantly in a study not of traditional firms but of successful hi-tech companies.
Pay and promotion are important areas in which this happens, with the owner wanting
to make decisions as has always been done, often expressing impatience with
procedures.
Personal control also has wider and more subtle effects. A tone extreme, it can
generate a pattern importantly identified as fraternalism by Scase and Goffee (1982)
in their study of the construction industry. In this pattern, owners and employees work
alongside each other as equals and there is a strong sense of shared identity based not
only on the firm but also the traditions of a whole occupation. To the extent that firms
here have a formal HR presence, HR practice will need to recognize egalitarianism
and possibly avoid or adapt systems such as appraisal.

At the other extreme, personal control can imply autocracy. Evidence of extreme
autocracy is in fact limited to certain sectors where sweatshop conditions are most
evident (Hoel, 1982). We saw above that in general small-firm workers report high
levels of job satisfaction. Moreover, even in sweatshop conditions that is, where
wages are low and market competition is intense autocracy is commonly moderated
to produce negotiated paternalism (Ram, 1994). The key reason is that employers
need a degree of worker co-operation. Moreover, family and kin connections mean
that there are mutual obligations other than the purely economic, so that straight
autocracy is limited.
Between these two extremes lie situations in which personal control is one feature of a
complex pattern of relationships. The evidence here is far from clear, not least
because it is often presented to attack a stereotype. A standard image of the family
firm is that of cultural unity [and] integration (Ainsworth and Cox, 2003: 1463). It is
then possible to undermine the image, as in the study just cited: evidence from two
Australian family-owned firms shows that unity and integration co-existed with the
expendability of employees, and there were also subtle divisions between the
immediate family and more distant kin. The danger, as noted at the start of the
chapter, lies in inverting the image of unity to stress control in the twin senses of
dominance by owners and the successful pursuit of the owners' goals. Such a simple
reading of the evidence should be avoided. Ainsworth and Cox (2003: 1476, 1480) in
fact offer a more subtle view of culture in small firms. First, employees had a sense of
commitment; in the words of one, they're a small business trying to make a living so
you are a bit more responsible. Second, the culture was not imposed but was enacted
and constituted actively by various groups.
This point can be taken further through a study of a larger firm, a software
consultancy with 150 employees (Grugulis et al., 2000). Training and development of
staff was stressed, and the firm even had a culture manager (apparently in preference
to the HR designation). In selecting new staff, character and attitude were stressed
over technical skills. The culture was one of working hard and playing hard, and
employees were well-paid and enjoyed satisfying jobs. Control did not mean
domination. At the same time, however, there was a strong expectation to fit into the
demands of the firm, and employees found it hard to maintain a line between work
and home. Control was subtle and it was part of a system producing benefits, but
itwas none the less real.
Several HR implications stand out. Grugulis et al. (2000: 101) stress that practices in
the firm were efforts to institutionalise simple, personal control and that the firm
deployed sophisticated HR practices. The task would then be to design combinations
of practices that maintained a culture while also establishing formal mechanisms
consistent with it. There might also be tensions to assess. Thus it is reported that there
was a pay structure of a kind, but that this was kept very secret and that employees
believed that they were paid purely as individuals. As the firm developed, the relevant
tensions may well have grown, and balancing a clear pay structure with the freedom
to reward individuals as managers saw fit might become a central issue.

Size and growth orientation

A US study reports that, at the start-up of businesses, HR is among the majority of

management functions that remain in the hands of the owners (Ardichvili et al., 1998).
As firms grow, sets of key functions tend to be delegated at the same time, and
delegation of HR tends to be associated with that of many other functions. The
implication drawn is that, at this point, an HR role will become important and that a
key part of the role will be the training and development of the new cadre of
managers. The turning point stated is $1 million in sales, which, with allowance for
inflation, might act as some kind of benchmark, though the point is likely to differ
widely according to business sector and possibly also country.
A UK study of management development found that small firms with a strong
orientation towards growth were the most likely to stress management development
(Thomson et al., 1997; also Patton and Marlow, 2002). A US study, using an objective
measure of growth (rate of increase of sales), found that high-growth firms put more
emphasis on HR practices than did low-growth ones (Carlson et al., 2006). Looking at
US firms that had reached the stage of making an Initial Public Offering on the stock
market, Welbourne and Andrews (1996) report that firms stressing HR had relatively
high survival rates.
However, it is important to note that increased formality is not an inevitable
consequence of small firm growth. It is not uncommon for business owners to set up
other small ventures to pursue growth objectives. The establishment of satellite
enterprises was a noticeable feature of Lazerson's (1988) study of small
manufacturing firms in the Italian region of Emilia Romagna. This growth strategy
enabled owners to maintain control, secure labour market flexibility, and achieve
organizational efficiencies. Importantly, a key factor was the continued existence of
extended families, which provided a foundation for economic relations based on
cooperation and trust, The importance of such non-market relations for economic
success explains the heavy reliance ex-worker owners place on turning to friends
and former colleagues in their search for employees (Lazerson, 1988: 31). Ackroyd's
(1995) account of small dynamic UK based information technology firms offers
further support for this modus operandi. Informal strategic affiliations and
temporary alliances between individuals and organizations of a similar size were
integral features of these firms; growth was achieved by replication. Such practices
were crucial to the firms' ability to change and diversify the scale of their operations.
An orientation towards growth is not necessarily restricted to the relatively
sophisticated firms. We have studied a small bakery, which had been in existence for
over 30 years. It was run by two members of one family and in many respects was
highly traditional and averse to formal HR systems. Yet it had grown, and two key
developments were to employ a production manager from outside the family and to
bring in a new director whose role was specifically to challenge the existing directors
and to encourage new ways of thinking. Ram et al.'s (2005) study of ethnic minority
businesses in the highly competitive restaurant sector further highlights the potential
for growth in seeming low value added firms. The popular it yofethnic cuisine has
resulted in ethnic restaurants taking an increasing share of rapidly increasing
consumer expenditure. Yet, as the study demonstrates, the perceived attractiveness of
the restaurant trade has caused the supply of Asian entrepreneurs to out-run even a
vigorously expanding demand, resulting in market saturation. Even so, simply
because the city-wide and regional markets are expansive, entrepreneurs are granted

some scope to shape the trajectory of the business. Ram et al. documented instances
of business owners developing new markets, adapting existing niches, and re-oriented
working practices. Firms that had sufficient resources expanded by opening more
outlets; they had relatively open practices to recruitment and management; complied
with employment regulations; and adopted more innovative approaches to new
product development. Other firms grew by concentrating on product differentiation
rather than multiple business ownership. Hence, rather than investing in new
premises, these firms concentrated their efforts on refining their products and
developing relationships with key staff that would nurture authenticity.
It is of course an open question as to what determines a growth orientation. To some
extent, it is constrained by sectoral location. Firms in declining sectors such as parts
of manufacturing, and those that are dominated by very small firms, such as
restaurants, will find it hard to grow. It is also strongly shaped by family ownership.
To the extent that the owning family uses the business to secure a satisfactory level of
income, growth will not be pursued. Growth also brings challenges of managing
expansion that may be avoided. A more positive view may be developed consciously
by owners with different characteristics, or emerge as a new generation takes over, or
develop even more by chance if a particular market niche opens up and allows the
firm to fill it.

Change management
In terms of the HR role in growth and change management, there are more
opportunities than might appear at first sight. Yet these need to be addressed in a
particular way. As Bacon et al. (1998: 260) put it, based on several cases, the
challenge was managing the introduction of the formalization necessary to retain
management control while not destroying the informality and the culture of the small
business. It was not a matter of ending informality but changing its nature and
making it more professional.
A detailed case study of a food manufacturing firm is relevant here, not least because
it was in a traditional manufacturing sector in Scott et al.'s categorization and yet
was able to carry out the processes described by Bacon et al. (see Ram et al., 2001b).
The result, as one manager in the firm put it, was that they had gone from being very
laid back to being laid back. A personnel manager was recruited, and formal
processes, not only in HR but also in the control of operations, were introduced.
These developments reflected but also reinforced the firm's move towards more high
value-added products, and also reflected the personal style and ambition of its owner.
The implications of not attending to the altered dynamics of informality that arise
from business growth are evident in Ram's (1999) ethnography of a small
management consultancy firm. During the course of the study, there was much talk of
growing the business, particularly amongst the directorate. To this end, the owner
introduceda formal business plan tothe rest of the organization in which he outlined
his views on how the firm should develop. The underlying motivation for the business
plan, which was the first formal one that the company had introduced since its
inception, was bound up with the owner's personal circumstances. In essence, he
wanted to retire in five to seven years; and as he approached that time, he did not want
to be burdened with working the 5060 hours per week that he currently had to
tolerate. Since the company was still in his name, the owner pointed out that it was

necessary to consider the issue of succession, and ways in which the company could
be re-configured. One of the options was growing the company sufficiently so that it
could be sold to a larger concern. Moving towards this kind of exit strategy would,
according to the owner, require a more transparently managed organization that had
approved quality standards across a range of areas. Some nine months after the
introduction of the business plan there was little if any talk of growth. There had been
little if any attention accorded to actively managing the process of change, with one
consultant bemoaning the lack of management. Towards the end of the fieldwork,
there was talk of redundancies, and the owner declared himself content to become a
freelancer and hence not having to pay the mortgages of six or seven staff . It
seemed that his aspirations for retirement would have to be achieved by working as a
freelancer himself in the future rather than selling a substantial business.

CONCLUSION
We have discussed formality and informality, and argued that the view that small
firms are informal, and that this is a weakness, is incorrect: informality is not total,
and it brings benefits not least in terms of employee responses. Moreover, much of the
focus in largefirms in the last tenortwenty years can be analysed in terms of a search
for informality: consider delayering and decentralization at strategic levels and team
work and empowerment in HR. There are practices that can be learnt from small
firms. As Bacon et al. (1998: 267) conclude, communication is direct, and links
between employee behaviour and firm performance relatively clear and immediate,
while change programmes are more organic and authentic.
This does not mean that informality switches from being a sin to a virtue. As Gray and
Mabey (2005: 480) remark, informality can co-exist with confusion and uncertainty.
Small firms always face the danger that a decision will be made out of personal
preference or in haste. This is particularly the case when they come into contact with
the formalities of state regulation in such matters as health and safety and individual
employment rights. Informality needs to be kept in check, just as too much formality
in large firms can lead to inaction. Informality and formality are enacted and
negotiated; they are not eternal unchanging characteristics.
As for models of HRM, Welbourne and Andrews (1996) make the interesting remark
that HRM, particularly in its Strategic form, implies a complex, and indeed virtually
impossible, task of continually fitting the components of the HR system together and
ensuring a fit with business strategy. In our view, this is one of the general problems
of the SHRM paradigm. It is particularly salient in small firms, which not only lack
the resources the engineer fit but which are also likely to endanger their informality
and flexibility if they try to do so. It makes more sense to think of HR practices as
being broadly tied together. The principles of SHRM are relevant in encouraging
firms to think actively about their HR practice and where it might connect to business
strategy. A rapidly growing software firm, for example, might be advised to ensure
that it has a payments system that goes beyond the merely ad hoc. But more
complexity could be counter-productive. The generic recognition that firms have
idiosyncratic competencies, and wider interest in the resource-based view of the
firm, imply that any firm needs to generate its own models (Boxall and Purcell, 2003).
This is particularly true of small firms, where personal relationships and the absence
of standard approaches, are central. HR in such firms needs to recognize the

constraints that arise, but also the possibilities of engaging flexibly in the
development of the firm.

NOTES
1 This strand appears to be largely European in its origins, with US research being
surprisingly innocent of it (Ram and Edwards, 2003). Our discussion necessarily
follows this fact in drawing heavily on European, particularly UK, evidence.
2 We looked at this in WERS 2004, which has data on the proportion of employees
trained to do jobs other than their own and the proportion actually performing such
jobs. The data show that there is in fact less of this cross-job activity in small firms
than in large ones; this is also true when we compared very small workplaces (59
employees) that were freestanding with workplaces of the same size owned by large
(100+ employees) firms. Our interpretation of this turns on the meaning of a job. In
large firms, jobs are clearly defined, often through formal job descriptions, and very
small workplaces will be, for example, the local branches of financial institutions. In
independent establishments, staff will be expected as a matter of course to take on a
wider set of duties. One indicator from WERS is that formal job evaluation schemes
are rare in small firms. We also found that managers' reports of employee job variety
and control pointed to higher levels of autonomy in small than in large workplaces,
which is consistent with the view that small-firm jobs are relatively flexible.
3 Note also that Kaman et al. (2001) follow the HPWS literature in including formal
grievance procedures as part of a high commitment model (Huselid, 1995). Such
procedures are surely fundamental to traditional personnel management, and
including them inflates the extent of commitment practices.
4 This study, by Paul Edwards, Sukanya Sengupta and Chin-Ju Tsai, embraced 89
firms in the 3 sectors, and included management interviews and, in 32 of the firms,
data from employees. Some results are reported in Tsai et al., 2007.
Further Readings

Entry Citation:
Edwards, Paul, and Monder Ram. "HRM in Small Firms: Respecting and Regulating
Informality." The SAGE Handbook of Human Resource Management. 2009. SAGE
Publications. 15 Apr. 2010. <http://www.sageereference.com/hdbk_humanresourcemgmt/Article_n31.html>.
Chapter DOI: 10.4135/978-1-8570-2149-3.n31