Most Tech Startups Build the Wrong HR Department
Most tech startups wait far too long to build out their HR departments. And when they finally do, they often get it wrong. This is because they narrowly define the scope of the HR function, thus rendering the department ineffective relative to the overall business strategy. Here’s one insider look at how this happens.
The field of HR has a bad reputation. It is especially true in tech startups where HR is widely viewed as a drag against the typical startup mission of “growth-at-all-costs.” At startups, the leadership team asks themselves, “what part of the general and administrative function should be outsourced or offload?” They decide to outsource HR services to a third-party company (PEO co-employment arrangement i.e., Tri-Net, ADP, etc.), then offload back-office administration to someone in accounting (i.e., getting employees into the payroll or benefit systems.) The HR department is often established later than product or engineering, and when it is established, one of the first HR roles is to ramp up recruiting and onboarding.
The evolution of the leadership team’s thinking is that they want hiring decisions to come from the team, not HR (especially with technical hires). Therefore, by design, HR does not play an integral role in the hiring decisions. This renders the HR department ineffective down the road, because HR won’t be able to know what roles need to be fulfilled for the business model to succeed or where the organizational gaps are. HR will not know what skills and talents will be needed to fulfill these roles. Ultimately, HR will have great difficulty analyzing why people are not meeting the business’s performance goals.
As startups grow in headcount, they will add an additional layer of management, while the HR function continues to stay fragmented and serves only as a support function. The co-employment relationship structure means the design of benefits, compensation, or general employment practices are already established by the PEO company. With hiring decisions made by the team (not HR) means that HR is removed from the business decision-making with limited understanding of why these positions are created, filled, or relate how these positions tie to the current business strategies.
By the time startups have raised their third or fourth round of financing and hit the 100-person mark, each manager may have on average a dozen direct reports and, subsequently, managerial tasks become quite challenging. For example, your VP Sales who began as your first salesperson, is now leading a sales team, designing sales process, sales comp system – and is not selling. The business demands grow quicker than the person’s learning and abilities. The hiring process itself can force the company to become more formalized. New hires put added pressure on the company to be more explicit about processes, and demand clarity around roles and responsibilities.
At this stage, most startups have hired an HR professional with only HR functional knowledge. This person is unable to respond to the ever-demanding business needs because by design, HR had never played an active role to link people and data to diagnose weaknesses and strengths of the organization. HR has never been an advisor to the leadership team regarding the talent implications of the company’s strategy. In short, because the HR department was never built correctly from beginning, with a narrowly-defined scope, no wonder the HR department falls short.