Long reads

Meet the billion-pound company without an HR department

27 May 2021 By Eleanor Whitehouse

Octopus Energy recently proclaimed its lack of a centralised people function. But why has eschewing HR become something to be lauded, and what can the profession do to prove its worth?

It was a revelation that got the HR community talking back in February when, as part of a BBC ‘CEO Secrets’ interview, Greg Jackson – boss of green energy start-up Octopus Energy – explained that he doesn’t believe HR departments make employees happier or more productive, so his company doesn’t have one.

It’s certainly a bold claim. But while there are a number of reasons companies may not have in-house HR, such as being too small or choosing to outsource it, Octopus does still have the capability in place – instead choosing to disperse its minimal people team within the firm rather than have a centralised function. Despite having a workforce of more than 1,200, the company has fewer than 10 employees performing people-related roles: a single HR business partner is part of finance; two recruiters work directly with managers to source candidates; and two L&D professionals sit under the sales team. Most immediate HR tasks are dealt with by managers, who are responsible for their own teams and are trained to deal with HR-related issues before being given management responsibilities. The company describes the set-up as scaling what small businesses without HR departments do.

The approach, Jackson tells People Management, stems from Parkinson’s Law. “As soon as you have a function, it creates ‘need’ for itself – it sees the world through its lens and expands to meet the needs it sees,” he says. “Often this not only costs companies money, but adds organisational sclerosis and friction, as departments get busy foisting stuff on other departments.”

And while it’s an arrangement that will undoubtedly raise eyebrows in HR circles, Octopus isn’t the first reasonably sized organisation to eschew a traditional HR structure, and is unlikely to be the last. High street stalwart Timpson is renowned for its unconventional people practices, with a very basic ‘people support’ team in place at a regional level. “They [HR] try to take over,” CEO James Timpson told HR magazine in an interview in 2009. “HR is [there] to support the frontline; it is not there to tell staff what to do.”

But what may seem like an untenable set-up to many has clearly been put in place with good reason. Jackson is clear that managers hold more autonomy at Octopus, are given “extensive” management experience above most of their peers, and are free to lead their teams as they see fit without the “fear” of hierarchy. “Managers shouldn’t need a department telling them how to do their jobs – they should be able to reach out and find expertise where they need it. It’s what small companies do and it works,” he explains.

While this decentralised set-up clearly works for Octopus, Jackson accepts that it may not work for other businesses. And it’s a choice that organisations have to make, explains David D’Souza, membership director at the CIPD. “Every organisation would want to be able to develop its people, hire people, pay people and support people, but there’s a decision that’s being made about whether you want a centre of excellence in these places,” he explains. “How much of that duty and those different capabilities you can devolve, versus the more traditional model of having a dedicated HR department that looks after all those things.”

But for those businesses considering a future with diminished, devolved or even dissolved people functions, a host of pitfalls potentially await. Although line managers undertake some HR tasks all the time, like recruitment and who gets promoted, one of these pitfalls is the “ever increasing” amount of legislation to conform to, says Emma Parry, professor of HR management at Cranfield School of Management: “IR35 is just one example. It’s a lot for line managers to take on and understand the intricacies of employment law.”

But aside from falling down on pieces of legislation, organisations risk lacking people with the right experience. A qualified HR person, whether in-house or external, will have the right qualification and know how to handle issues, explains Lucy Heath, people and HR consultant at law firm Charles Russell Speechlys: “Rather than what would essentially be a line manager saying ‘where do I start?’”

Many areas of HR are also very technical and require specialist knowledge, such as TUPE regulations and shared parental leave, adds Sarah Mason, chief people officer at Foxtons: “Without that expertise, line managers could inadvertently cause problems. Other HR specialisms require specific knowledge to ensure the task is done well, such as understanding how bias and different selection methods can affect the hiring process.”

Washika Haak-Saheem, associate professor of HR management at Henley Business School, points out that, without centralised HR, businesses risk having a “large discrepancy” between their policies and practices. “There would be no binding in between – you have policies, but line managers employ different practices,” she says. “This could be dangerous because you’re diluting your policies, your values and your culture.”

And it’s also likely to become a problem when a business looks to develop a people strategy, adds Parry. “HR is about how you get the best out of your people in relation to delivering the strategy. I struggle to see that you can expect line managers to understand fully how to do that,” she explains. 

Attributing more responsibility to line managers is potentially problematic for the managers themselves, at a time when they are becoming increasingly responsible for myriad other important areas such as mental health. “There are limits to what any individual can do with the number of hours in the day,” says Parry. “Are we asking them to do everything around managing people, and deal with all the conflicts and grievances and challenges that happen in every organisation, but that eat time? To me, that’s just not a sensible organisation design proposition.”

But as D’Souza notes, the presence of an HR function and line managers becoming more accountable shouldn’t be in conflict with each other. “Most HR professionals would like line managers to take more accountability, yet they [organisations] think [devolving HR to line managers] is the best way of solving that problem,” he says. “But what they miss out on is expertise to help them grow a business, enhance its capability to be better placed to achieve what it needs to do, and of course stay legal.”

Angela O’Connor, founder of The HR Lounge and former HR director, agrees. “More than anything, it’s potentially missing the opportunity to take steps forward in not just development, but productivity, innovation and creativity,” she explains. “Those things can be released with the right HR people in place.”

It is possible, Parry theorises, to set up an organisation without HR. “You could bring in external consultants to design the policies and frameworks, bring in people to train managers and think about how you get the best out of people. And you can outsource all the transactional stuff. And if you do get into problems, you can pay an employment relations expert to deal with that,” she explains. “But it’s a lot of hassle for the sake of not having an HR function. In theory you could do it, but I’m not convinced of the value.”

But perhaps a more pressing issue for the profession than just the disadvantages of having no HR department is why some businesses see this as a positive thing. “Particularly for smaller organisations in their first phases of growth, it can be very attractive to not have HR, especially if they associate that with some of the things HR would have been associated with in the past, which is a need for someone to police or create bureaucracy, or create policy that’s going to get in the way of them doing what they need to do,” says D’Souza.

As part of her research, Haak-Saheem spoke to young CEOs in the tech, IT and engineering industries who saw HR as something they “don’t need to look after in-house”. “Their perception is that HR is good for admin and they would like to outsource it, but that line managers should be able to look after their own people,” she explains. “I think this is driven by their perception of what HR can and can’t do.”

Parry agrees there is a “perennial problem” with the image and value of HR. “People have a perception of HR as something that’s very transactional, bureaucratic and old-fashioned, when they want their organisations to be cutting-edge and agile,” she says. “That means they translate that into ‘let’s not have HR’. For me, that goes back to decades of HR trying to prove that it’s valuable, and move away from this image of being administrative to something more strategic.”

And O’Connor is of the belief that many organisations – especially “young, organic start-ups” – see HR as “the suits” who come in only to take over and exert control. “But that’s not the HR people I know,” she says. “They can be cheerleaders for the organisation and the people who are most progressive in bringing about change. I wonder if there’s a mismatch between what people think HR is and what we know great HR can do.”

One cause of this mismatch is likely to be people’s past experiences of HR. “Unfortunately, a lot of people have a horror story,” says Mason. “We need to tip the balance to ensure people also have plenty of examples of where HR has supported good people practices and positive working environments, and enabled meaningful careers.”

Similarly, O’Connor assumes those who forgo a people function do so because of previous dealings. “I wonder what HR experience senior people in organisations had in the past that led them down the path of ‘we don’t want HR’,” she says. “Maybe someone’s had a bad experience in the past, because, with some of the great HR people I’ve worked with, the managers want more because they can see how it can help the organisation to succeed.”

And, D’Souza points out, a less-than-positive past experience shouldn’t mean bosses shun the function altogether. “No one wants a bad HR department, but that shouldn’t lead to people not wanting an HR department at all,” he says. But if HR does have an unfavourable reputation, how can it rectify that? D’Souza highlights that the best way to fix a PR problem is to make the problem go away. “So as the profession continues to have greater impact, you’ll find more CEOs championing the profession, which makes a more significant difference than us talking about how excellent we are,” he says. But that doesn’t mean HR professionals should avoid talking about how excellent they are. “There’s a positioning piece within every organisation for HR teams to be really clear on the value they’re adding, and to make sure the work they’re doing is about enabling, not controlling, organisations,” D’Souza says.

Parry agrees that it’s HR’s job to drive change in the perception that it’s too slow or policy heavy. “I would prefer to see the Timpsons and Octopus Energies of the world working with HR and asking how they can manage HR in a way that promotes agility and empowerment,” she explains. “That must be more productive than just saying ‘getting rid of the formal function will make everything better’, because it won’t.”

The pandemic has also been a golden opportunity for HR to demonstrate its integral organisational value – a plight kicked off by a widely shared March 2020 article in The Economist entitled ‘The coronavirus crisis thrusts corporate HR chiefs into the spotlight’. “It’s about promoting more of the success stories,” says O’Connor. “There’s a lot we can do by talking about how we as a profession can make things great for organisations. And I’d like to see more chief execs talking about the value of great HR.”

But one thing the profession should avoid doing is becoming defensive when organisations question its role. “There are different ways of configuring work – be it outsourcing or using consultants – that will work for different organisations,” says D’Souza. “But there comes a point in any organisation’s growth where you need deep expertise, and that is still undervalued until it causes them a problem.

“That’s where we need to be proactive in saying to businesses that we don’t just solve the problem when you have a legal issue, we solve the problem of how to get people flourishing.”

O’Connor agrees. “When I read the BBC interview with Octopus, I didn’t feel for a minute it was an attack on HR – I thought it was somebody saying ‘this is how we want to develop the organisation’,” she explains. “We can’t take things personally – we just need to keep moving on in the way we do.”  

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