Updated: Aug 25
Just as you wouldn't leave for a week-long hike without some preparation, we start off our journey of this season by looking ahead. In this episode, we discover a common hurdle that will become a blocker to start-up growth down the track if we don't prepare for, now. The hurdle: HR debt.
What is HR debt?
For better or worse, we all have experience with debt, whether it’s a mortgage, a business loan, or the maxed-out credit cards you cut up and hid in the ice cube tray in the freezer (no judgments here).
Debt is what you borrow from the future, for today.
Personal (and business) finances aren’t the only places we see debt occurring. Engineering teams have adopted the term ‘technical debt’ to describe the compromises in software you accept for a temporary increase in velocity. There’s a decrease in long-term velocity as these compromises become bumps you have to work around in the future - this is the interest you pay on your compromise.
So, in tech as in finance, we accrue debt as a shortcut to our end result and, eventually, the bill on that debt becomes due.
The same applies to the world of HR.
In start-ups, it is not unusual to take an easy and usually quick approach to expedite the delivery of a ‘great culture.’ What does this look like? Perks that are easy to implement such as a ping pong table 🏓, free snacks 🍌, or dogs in the office 🐶.
There is evidence that these sorts of perks are great for employee morale. However, what we need to be aware of is that there are fundamental HR solutions that we need to have in place for our employees in order for them to take the business to where it needs to be. For example, embedding values, building high-performing teams, growing future leaders and laying down scalable HR infrastructure.
Too busy for efficiency by Daniel Okwufulueze
Not starting on these early means we are just borrowing the time, money and other resources from the future by choosing the easy solution now instead of investing in a better approach that would take longer or cost more. That’s why it is called the HR debt - we will have to pay up eventually to enable the business to scale.
This is what engineers call refactoring. We have to spend time and resources to ‘clean up’ or restructure what we had - and most of the time with no visible new features shipped. In HR terms, this means putting the brakes on delivering any new, sexy HR initiatives as you build the foundations these initiatives can launch from. Let’s face it: as much as us HR folks would love to think it, for most people building back-end HR processes such as how to request for headcount, calibrating salary to external benchmarks, integrating two HR systems or cleaning up employee data are just not sexy (or even visible) - but it’s a debt we have to pay if we want to be able to grow exponentially.
Steve Blank put it like this, ‘Just when things should be going great, [HR] debt can turn a growing company into a chaotic nightmare.’
If we want to avoid scaling nightmares while we grow at lightning speed, we need to avoid accruing too much HR debt or accrue only what we’re willing to pay back in the future.
HR debt isn’t just for the HR team to pay:
the whole business can be left feeling the effects of a hefty bill.
Of the many scale-ups I’ve worked for, there’s one that stands out where I learned the lesson of how impactful HR debt can really be. The company was in a hyper-growth stage with enough funding to develop more products and enter into new markets. It was all systems go, all guns blazing; we were ready to press the button on our next exciting stage of growth and expansion.
However, a highly concerning trend became apparent: the tenure of employees was around 1.1 years. By the time someone was onboarded and reached full productivity, they were already on their way out the door! I estimated that if the rate continued based on the projected business growth, the cost to the business was going to be roughly $17 million across the next 2 years. This was measurable loss alone, not including all those other equally important factors, including the loss in expertise and continuity of the business strategy.
It was clear there was a fundamental challenge here that added perks of more yoga classes and salaries above market rate weren’t going to resolve. Putting pressure on our recruitment teams to continuously hire more people to replace those leaving did not resolve the issue - it was like trying to fill a cup with a hole.
Lacking the foundations of great HR practices and resources, our HR function was too swamped running basic day-to-day HR to even consider addressing broader business challenges. These were fundamental operations that couldn’t be ignored without the wheels falling off: people needed to be onboarded, salaries needed to be paid, contracts needed to be issued, etc. With no resources to tackle the larger business challenges, it eventually led to a massive stunt in the business growth. Until the HR debt was paid, we were stuck paying interest on the easy decisions made earlier on in the business.
This is a cautionary tale - #bewareHRdebt before it slows you down!
Reduce HR debt by investing early
I vividly remember a conversation I had with a headhunter years ago. He was pitching a role to me at a high-potential FinTech start-up in London. When he said “they are currently at 6 people with a growth trajectory to 50 in the next 12 months”, I immediately stopped him and politely told him I was not interested.
Why? Having worked in the start-up scene, my experience has taught me a few things. During this stage of growth, founders are looking to hire their first HR person to do a variation of… well, everything such as legal protection, recruitment, record keeping and policy creation, employee training or culture development (🏓ping pong table, 🍜free lunch and 🧘♂️office yoga).
So I said, why don’t you hire these 3 roles in the next 12 months: (1) a recruiter - immediately, (2) an HR coordinator - immediately and (3) an HR generalist in the next 6 months.
His response: ‘In my experience, that is what founders typically do. However, this CEO is not a first-time founder and he wants to hire an experienced HR person who has taken a business through scaling. The CEO has learned that when he needs to hire an experienced HR person to scale the start-up, it is too late. The problem has already accumulated.’
In his previous start-up, he had most likely encountered the common business needs and crisis points as he journeyed through the phases of growing a start-up. Being aware of the business and employee needs, he already anticipated what’s ahead and knew that if you accrue HR debt now, you will have to pay it back in the future - no two ways about it.
Build HR with the intention of a curling team vs a fire fighting squad
As HR is seen as a cost center, usually start-ups will hire HR teams when there is a fire that needs putting out; either: you’re forced to by HR operational needs, or you’re asked by your VC, or you want to cover yourself legally, or your culture sucks.
Instead, the progressive Mr. FinTech CEO had the right idea. His strategy was to bring in an HR person as the ‘sweeper’ in a Curling game. As he and the rest of the business were delivering the stone to the intended goal post, the HR person and their team were to remove potential obstacles (such as recruiting, growing performance, retaining great talent) that would prevent the stone (business) to slow down - or stop altogether.
So, from the moment you hire your first HR person, make sure they are already laying HR foundations that are future-proofed, scalable, streamlined and automated, so that every new HR person you hire in the future is able to focus on your employees and business, instead of refactoring HR debt.
I am not advocating that every first HR hire should be a Director, Head of or VP - or it has to be a full-time hire. Every start-up has its individual strategy and needs. How HR teams should be structured depends on the business's strategy, journey, ambitions and values. Start with asking ‘what do you want your HR function to achieve?’ Once you know that, there are varying ways to build your HR team to achieve that goal.
In the next episode...
HR debt is an impact that can be felt by the whole organisation and has consequences that slow down growth momentum in start-ups. What can you do to reduce HR debt? Stay tuned to find out!