How an HR Operating Model Changes with Scale
If HR departments want to deliver excellence, they need to set up an effective HR operating model. In this article, we’ll look at how the HR operating model evolves in a rapidly scaling company that goes from 40 to 400 employees in just three years. Looking at a specific case and how it changes over time provides an easy-to-understand example of an HR operating model. It also covers the kind of situations you might well run into in your career.
Contents
What is an HR operating model?
Changing HR operating model with scale
– Getting off the ground: 0 – 40 employees
– Year 1: 40 employees scaling rapidly to 100
– Year 2: 100 to 200 staff
– Year 3: 200 to 400 staff
Looking back on this journey
What is an HR operating model?
An HR operating model describes how HR is organized to deliver its services. More specifically, it outlines the organizational structure of the HR department, what the main roles do, technology, key processes, and the most important metrics. It’s the same idea as what is sometimes called an HR delivery model or HR architecture.
The goal of an HR operating model in organizations of any size is to help the HR department to operate efficiently and effectively.
Effective HR operating models are based on wider HR models, which outline the HR’s role and positioning within the business. Well-known HR models include the HR Value Chain, the 8-Box Model, and the Harvard Model of HRM.
Changing HR operating model with scale
Getting off the ground: 0 – 40 employees
Let’s imagine a company sells souvenirs from Hollywood movies to collectors. It’s based in Los Angeles and was started by a group of friends from the film industry. As they get off the ground with just a few employees, there won’t be anyone specializing in HR. The team will hire from the pool of people they know personally or are referred by a trusted friend. HR decisions are ad hoc, and the culture will flow organically from the CEO and the top team’s personality. If we dare call it that, the HR operating model is just the team figuring things out as they go.
Year 1: 40 employees scaling rapidly to 100
As the company finds that the demand for objects dusted with Hollywood’s glamour is high, they need to start hiring a lot of new people. The CEO decides it’s time for an HR function.
How do we know it’s time for a change?
What hits home to the leadership team is that HR work, in particular hiring, is taking up far too much time. They also recognize that the process for sourcing talent that they used before, hiring people they know, is running out of steam. In essence, what they did before is no longer working, so they need their first HR operating model.
How to set up the HR operating model
At this point, HR has three priorities:
- Hire good people.
- Bring some order to how they manage compensation.
- Handle the basic administration and compliance duties efficiently.
What kind of HR operating model will deliver that? Here’s one solution:
- The CEO continues to act as the head of HR. They are making all the critical HR decisions and providing direction.
- An HR manager is hired or promoted from within if a capable person is available. They ensure the day-to-day priorities are handled and begin to set up policies and procedures to create efficiency and consistency.
- There is a lot of hiring. It’s seen to be a critical activity, one or two people with experience in recruiting are hired full time.
Notice how the HR operations setup is driven by the demands of a rapidly scaling business and the limitations of what is possible in that size of the company. We might like to have a specialist focused on culture or engagement. However, we cannot afford that at this stage of development.
There’s some tension in the operating model. The CEO has to learn to delegate HR tasks to the HR manager. They also have to follow the policies and procedures rather than make off-the-cuff decisions. A potential risk at this stage is that an administrative assistant who has been handling some HR work is promoted to the HR manager role. If the person is highly competent, then they may grow into the role. However, there is a risk that they won’t have the capability to handle the role, especially when you consider what is to come next year.
What alternatives do we have?
There are always alternatives to any given operating model. In this case, the company could largely outsource recruiting. Similarly, the company can decide to outsource much of the HR administrative work. One of the crucial decisions is how we define the role of the HR manager. Is the position defined as someone who can run HR in a 100-person company, or is it someone who can take a 100-person company up to 400 people and beyond?
Year 2: 100 to 200 staff
In Year 2, the business continues to take off with increasing numbers of orders from Asia. This year they double in size from 100 to 200 staff.
How do we know it’s time for a change?
The main signal for change is the volume of work. In year 1, HR needed to hire 60 people; this year, they will need to hire 100 new employees plus replacements of people who have left. Another signal is that there is a hint of a change in the culture of the workplace. There are a lot of new people, and not everyone knows each other. HR will be wondering if and how they need to change the operating model, perhaps add a new role, to address that.
How to change the operating model
Let’s start by asking ourselves how many HR employees are generally appropriate at this size of an organization. A rough rule of thumb is 1 HR professional for every 50 to 100 employees. Typically, the larger the firm, the fewer HR pros you can have per employee.
You have to take any estimate of HR to employee ratio with a grain of salt, especially in small organizations. You may need extra talent acquisition professionals in a rapidly scaling company. If we were building an operating model for a company with a stable population of 100 employees, they would likely only be hiring a few people a year. There wouldn’t be a need for a full-time talent acquisition specialist at all.
All that said, if we focus on the final count of 200 employees in the company, then we might expect to have 4 to 6 HR professionals. That is if we include the recruiters which we need due to the rate of growth. In recruiting, the organization structure needs to add roles for one or two more recruiters.
At this point, HR will need to consider what IT systems it needs to deliver its services. It will probably need an applicant tracking system (ATS). The team will also be considering moving data off of spreadsheets into a proper HRIS.
The easy culture that existed when they had fewer than 100 people is stressed with all the newcomers. HR will have to launch programs for onboarding, for reinforcing the culture, and for training and development. This means adding a new role, perhaps an HR business partner (HRBP), to set up and manage these programs.
It’s worth noting that the culture will also have to evolve to suit what is now a much bigger group of people. The HR team will need to work with the leadership to clarify what sort of culture the organization wants to have.
There will also be a change in the role the CEO plays. While a CEO is always a key figure in guiding HR, at this point, the HR department should be able to handle all the standard HR matters without any significant involvement from the CEO. It’s clear now, if it wasn’t before, that the HR manager needs to be a true HR professional who can lead a broad range of HR programs.
If the HR department is smart, they will be as focused on getting processes and the automation afforded by the HRIS in place as they are on handling the day-to-day work and firefighting. At this point, it is becoming a real company, with more formal roles and responsibilities. More planning meetings. Less flying by the seat of one’s pants.
What alternatives do we have?
One decision to HR has to make at this point is how much they want to use technology to drive the delivery of services. Does it want just a basic ATS and HRIS to handle essentials for a company this size? Or do they want a full-functioned HRIS that enables processes like onboarding, performance management, employee self-service, etc.?
It’s also possible that the CEO will want to have HR report to the CFO at this point. That would be one alternative to the operating model outlined above.
Year 3: 200 to 400 staff
As the company goes into year 3, there is no stopping it. Its reputation continues to grow, and revenues go up steeply. To keep up with demand, the company grows to 400 staff. How do we organize HR to handle this?
How do we know it’s time for a change?
The main signal for change is that the company now feels notably different than it did a year ago. Employees are asking questions about development and career paths. There is now a significant layer of middle management that needs support. Retention is becoming an issue for the first time. Our basic HR operating model that consisted of an HR leader, talent acquisition specialist, and an HRBP now needs to grow up to offering the full range of HR services.
How to change the operating model
HR may need to add a level to its department structure. For example, there may now be a manager of talent acquisition with the recruiters reporting to them. At this point, robust IT systems and efficient recruiting processes will be an important part of how talent acquisition delivers its services.
In today’s world, where this is a SaaS app for every HR process, the HR manager should be looking for help from their IT team to establish processes for deciding which technologies to adopt. They could also opt for a consultant.
HR will have to hire a few more professionals, such as HRBPs. Their job will be to build the needed processes around development, career planning, and retention. The HR manager may keep all these people reporting directly to them but will certainly be considering adding a role of ‘OD Manager’ or something similar.
As for the HR manager themselves, that role will be transitioning from one responsible for personally delivering many of the HR services to one responsible for managing an HR department with the professionals doing the hands-on work. The HR manager needs to recognize that the changing operating model may mean giving up some activities that they enjoyed doing.
Metrics
HR hasn’t particularly focused on metrics up until this point. The numbers were small, and leaders would know each case. For example, in a smaller company, the CEO could probably easily remember each person who had quit and why they had left. Once a company hits 400 employees, HR will want to start collecting basic HR metrics such as exit interview data, cost per hire, time to fill, turnover, and engagement. If it has hired an analytics professional at this point, the function will be in an excellent position to present credible data to the leadership team the way other functions do.
What alternatives do we have?
At this stage, the HR manager will be looking at any work they outsourced and wonder if it’s time to bring it in-house. The HR manager may also decide that they need an HR analytics professional even more than they need another HRBP. There is also the choice between having a team of HRBPs who are essentially HR generalists or moving towards more of a center of excellence model. This would mean, for example, hiring a learning and development manager rather than a generalist HRBP.
Looking back on this journey
We have watched a company get off the ground and then move from 40 to 400 employees in just three years. The HR operating model begins with nothing more than a few roles: an HR manager and some recruiters. As the company grows, not only does the size of the HR function grow, they also need to add IT systems and processes as part of their operating model. With the company growing further, the HR function becomes more hierarchical. It adds a level of management between the head of HR and the HR professionals.
At each step of the way, roles change. The head of HR moves from being a doer to a leader. The recruiting team may specialize in areas of sourcing and selection. New roles with new responsibilities such as onboarding will be added. The key is that HR is always adapting to the changes in what it needs to deliver.
A final word
The term “HR operating model” sounds technical, maybe even intimidating. In practice, it is merely a description of how we organize HR to get things done. How you organize should always start with an understanding of what the business needs HR to deliver. From there, it’s a matter of an HR department structure, clarity about what each role does. You continue with a look at IT systems, processes, and metrics to track how well you are doing.
In a rapidly scaling company, the main point to notice is that the HR operating model needs to change every year. How things are done in a 40-person company fails when it becomes a 200-person company, not to mention a 400-person company. A savvy HR professional will have a mental model of how the department needs to organize to meet current needs and how it will have to change to meet future needs.
If you want to learn all there is to know about HR Operating Models, check out our HR Leadership Certification or Organizational Development Certification.
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