Achieving Sustainable Performance in SMEs: the role of HR
How can HR help SMEs create competitive advantage through people?
In previous issues of our LEADINGThought newsletter, we focused on how unlocking potential in SMEs can boost productivity and drive sustainable growth. Small and medium-sized businesses (SMEs) account for 99% of businesses worldwide and generate 60% of employment and 50-60% of value added in OECD economies [10].
Despite their economic significance, SMEs often face unique challenges in managing their people effectively. Unlike large organisations with dedicated HR departments, and sophisticated systems, SMEs typically operate with limited resources, informal structures and evolving priorities.
The consequences of ineffective HR practices are stark. According to McKinsey’s HR Monitor 2025, only 46% of hiring efforts succeed in Europe, and 18% of new hires leave during probation, underscoring the need for strategic HR interventions [6].
So, what is the role of HR in helping achieve sustainable performance in SMEs and how can SMEs leverage tailored HR practices to manage their people effectively and build competitive advantage through people.
The SME context: Nature and Challenges
According to the US Chamber of Commerce, 18 percent of small businesses fail within their first year, and that number grows to 50 percent and 65 percent after 5 and 10 years [4]. Closer to home, the UK’s Enterprise Research Centre 2024 report (ERC) on the state of small businesses, finds that only a small proportion of the 1.28 million private sector enterprises achieved key transitions. Of the 325,811 start-ups registered in 2020, only 47 per cent survived to 2023, and of these only 2 per cent (3,049) managed to achieve £1m turnover after three years – a proportion that has remained constant over the UK in the last decade [3].
Research evidence suggests that significant trigger events are key in rethinking strategy and performance and accessing support to help navigate these phases successfully. According to the UK Government’s Business Productivity review, a key element in improving the productivity of UK SMEs is realising the potential of business support available, finding the right advice at the right time[11]. This is typically the time when SMEs are most likely to consider HR advice and support, covering a broad range of potential activity. For example, in response to expansion in staff numbers, hiring and onboarding, formalising HR processes, and ensuring adequate management structures are in place, or conversely competitive pressures and external shocks resulting in financial challenges may lead to restructuring, redundancies, or performance management processes.
People are a critical consideration for small businesses and realising that unique, talented and committed people are harder to imitate than financial and technological resources can be an effective tool for growth and to create competitive advantage.
Nevertheless, in leveraging HR practices within SMEs we need to be mindful that:
Traditional corporate HR models are not suitable for smaller firms, given the unique characteristics of SMEs. Academic research has recently highlighted the importance of the SME context and has captured the distinct characteristics for understanding HRM in SMEs through the RECIPE framework (Resource constraints, Entrepreneurial orientation, Concentrated ownership, Informality, Proximity of relations, Employee dynamics) [5].
There is also a view that implementing HR practices typically adds a layer of structure at small companies that might take away the unique appeal of agility and flexibility. However, research has shown that if the HR practices work well together and are mutually reinforcing, they can have significant economic effects with up to a 7.2% increase in workforce productivity for an average-sized* business [7].
The ‘how’ of implementation is as important if not more important than the ‘what’, i.e. which practices are implemented. How employees receive and understand HR practices will have a significant impact on their successful implementation and impact.
Achieving Sustainable Performance through HR
HR has a vital role to play in boosting productivity and driving long-term performance in SMEs, whatever the state of organisation transition. Research by the CIPD has demonstrated that through identifying the current stage the organisation is in and then anticipating and responding in a timely way to opportunities and challenges presented at inflection points, the HR professionals in SMEs can help drive sustainable performance [1].
The Productivity Institute and Conference Board report on productivity, have highlighted the six key drivers for people-based productivity – skills building strategies, management capability, worker well-being, diverse workforces, agility and resilience, transformative job design – and the opportunity for the people function to fully capitalise on these drivers [2].
Unpicking the benefits of HR practices and their outcomes is not an easy task, and in the majority of small businesses HR is a minor portion of the responsibilities of the person who oversees it. Nevertheless, research has found that when business owners engaged with external HR support at the back of significant trigger events, they perceived the benefits of implementing HR practices, as their understanding and confidence grew which then also led them to progress further and consider more progressive practices.
The CIPD’s report on maximising the impact of HR in an SME context highlights the importance of [9]:
Recognising the unique context of SMEs and what is important for the owner and key stakeholders.
Demonstrating a broader business understanding and be willing to operate outside the HR ‘silo’.
Maintaining a balance between operational and longer-term strategic focus given the pace of evolution’.
Leveraging technology to streamline HR processes and improve decision-making
Leveraging HR technology is increasingly becoming a key factor for HR effectiveness within SMEs. Automating operational tasks can release capacity to contribute to the broader business priorities and goals and respond effectively to business needs, while real-time employee data can ensure that businesses stay in touch with employee motivations, needs, and feedback.
The adoption of scalable HR analytics is still in its infancy, but initial studies from the US have demonstrated that SMEs that utilise HR analytics experience up to 75% increase in employee engagement and 31% reduction in voluntary turnover [8]. However, effective adoption requires strategic data governance frameworks, targeted upskilling programmes, robust information systems, and cost-effective analytics tools.
Achieving HR effectiveness in SMEs is critical in helping to address people challenges and drive sustainable performance and growth. Recognising the unique context and characteristics of SMEs can help tailor HR practices for maximum impact and unlock potential through people.
Resources
Achieving sustainable organisational performance through HR in SMEs. CIPD, Research insight, 2012.
B. van Ark, M. Devine (2024). Productivity Through People: New Opportunities for CHROs, a joint report from The Productivity Institute and The Conference Board.
Enterprise Research Centre, 2024. The State of Small Business Britain: A Manifesto for Growth and Productivity, Enterprise Research Centre. United Kingdom. https://www.enterpriseresearch.ac.uk/our-work/publications/the-state-of-small-business-britain-report-2024/
Bevilacqua, K. (2024, January 18). How Small Businesses can better leverage HR. SHRM.
Harney, B., Gilman, M., Mayson, S., & Raby, S. (2022). Advancing understanding of HRM in small and medium-sized enterprises (SMEs): critical questions and future prospects. The International Journal of Human Resource Management, 33(16), 3175–3196. https://doi.org/10.1080/09585192.2022.2109375.
HR Monitor 2025: A comprehensive look at the HR landscape. McKinsey and Company. https://www.mckinsey.com/capabilities/people-and-organizational-performance/our-insights/hr-monitor-2025.
Kang, S., Han, J. H., Oh, I.-S., Van Iddekinge, C., & Li, J. (2025). Do human resource systems indeed have “system” effects? The dual internal fit model of a high-performance work system. Journal of Applied Psychology, 110(4), 575–597. https://doi.org/10.1037/apl0001241
Kemisola Kasali, Gideon O. Toriola, Essien. Ndifreke Deborah, Titilope Akinyemi and Richard Kofi Kyei. Developing scalable HR analytics platforms for SMEs with data-driven strategies to empower smaller businesses. World Journal of Advanced Research and Reviews, 2025, 27(02), 941-950. Article DOI: https://doi.org/10.30574/wjarr.2025.27.2.2930.
Making maximum impact as an HR professional. CIPD, April 2015.
OECD. (2019). Strengthening SMEs and Entrepreneurship for Productivity and Growth. OECD Publishing.
UK Government (2019). Business Productivity Review.