Hiring -- Inside or Out?

The allure of the unknown sometimes prompts hiring managers to seek out external talent -- unaware of their flaws -- when qualified employees are already on staff. While hiring from the outside is certainly appropriate at times, it can cost a company in terms of employee loyalty and productivity.

Tuesday, November 10, 2009
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The unknown seems to hold an allure that the known often finds difficult to compete with. The same phenomenon that, as children, made the "new kid in school" so interesting and immediately popular sometimes rears its head when hiring managers find outside job candidates so intriguing.

Internal candidates are often at a disadvantage because they are known commodities. It would be rare to find an employee who doesn't have a blemish or two in their background that can tarnish what might be an otherwise stellar candidate.

When such individuals come from the outside, the blemishes are more likely to be hidden -- at first.

"Bob comes to work every day sober, he meets deadlines, he's productive -- but he's not glitzy or glamorous and, by the way, he doesn't have great people skills. So let's overlook him," says Linda Henman, president of Henman Performance Group in Chesterfield, Mo. 

Bringing someone in from the outside can lend new perspectives and experiences, but it also requires that the candidate successfully adapt to the organization's culture. Cultural issues -- and the learning curve -- can become magnified when the new hire comes from a different industry or distant location.

"They have the challenge of having to adapt what's made them successful in the past to a new environment, so they do have a tough road ahead of them in terms of being able to establish their credibility in the organization," says Rebecca Schalm, a Calgary, Alberta-based practice leader of executive selection and integration at RHR International.

"They have to figure out how to get things done, how to influence people -- when they don't necessarily know who the people are they should be influencing. It can take a lot longer to really figure things out and get traction," she says.

She says studies have found that between 40 percent and 60 percent of external hires "are unsuccessful," compared to "about 25 percent for people who are internal."

In addition to culture issues affecting the success of external hires, there is more general uncertainty.

"As good a screening as you can do, you will still overlook certain character flaws or people skills that you don't hear about or that don't show up in all of your checking," says Richard Reinhardt, vice president of F&H Solutions Group, an Atlanta-based affiliate of the Ford & Harrison law firm.

He recalls a situation in which a client hired an external candidate as the new president, a man who, it turned out, had ethics issues. "They did all sorts of background checks and everything checked out," he says, "but the things he was doing would be totally unethical in any business."

It is not at all uncommon to make missteps when hiring externally, agrees Henman.

"The penalty can quickly add up to nearly half a million dollars when you're hiring somebody who is going to make $100,000 a year -- we usually say that four times that person's salary is the cost of a mistake," she says.

What often drives hiring managers and HR professionals is the feeling that "maybe there's somebody better outside than what we have inside," says Schalm.

A common argument for not hiring from within is that "we don't have anybody with those skills," but, experts say, coaching and training existing staff can be a more cost-effective alternative.

"You can't make them smarter, more honest or make them love accomplishment more -- they have to come with that," Henman says. "But, if they don't know how to run a meeting or how to make small talk or how to mentor and coach their people, these are all things that are teachable and learnable.

"So let's talk about the talent you have and separate that which can be developed from that which cannot be developed and let's give the people internally a chance," she says.

Appropriate Hiring Ratios

Kurt Weyerhauser, managing partner of Kensington Stone, an executive search firm based in Los Angeles, says that "many, if not the majority of, companies are focused too much on reducing immediate financial costs, as well as reducing the cost of time that goes into training, mentoring and developing employees."

"They do so without proper forethought to the long-term consequences of not having a healthy number of internal employees capable of stepping up," he says.

"You might tend to believe I'm a big advocate of external hiring, but actually I preach balance," he says, noting that a hiring ratio of 35-percent external to 65-percent internal is most appropriate.

"I always like to ask a potential client: 'Are there any internal candidates we can consider and, if not, why not?' "

Internal candidates who move into new roles may need training and support, says Reinhardt, but the cost of employee development can be offset by the costs of acculturation that are always present when hiring from outside.

"Most of the time," he says, "you're better off promoting from within for most jobs at the first-level supervisory level or even middle-management."

And, even for the high-level positions, he says, a primary drawback can be that, by overlooking internal talent, the organization is limiting the future of some of its high achievers, who may choose to go elsewhere to advance their careers.

Hiring from within, Henman says, "really does stimulate employee loyalty to the company and that's what you want. ... I tell this to my clients all the time -- all other things being equal, the devil you know is better than the devil you don't know."

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For those organizations that hire frequently from outside, Weyerhauser says, there is also the possibility of cultural "fissures" developing within the organization. That can occur when existing employees attempt to adapt to fit the cultural norms and personalities of the new hires, rather than vice versa.

"Instead of a semblance of continuity and stability holding an organization together, more and more cracks appear as a higher percentage of outside hires changes the face of an organization faster than it can handle the change."

Of course, the other side of the coin, says Schalm, is when internally promoted employees "are potentially colored by 'this is how we've always done things here.' "It may be tougher to have them really bring a different lens to the situation."

While the pendulum does seem to swing in favor of internal hires, however, there are no clear-cut answers.

"The fact is that every organization has different circumstances and different challenges they are facing, so there is no way to universally define what is the perfect balance," says Weyerhauser.

A Clear Strategy

Ultimately, any hiring decision should be made based on a solid strategy at the outset. Strategy will provide insight into the relative value of looking outside versus looking within.

Hiring from the outside may make sense when organizations are moving in an entirely new direction -- entering a new market or developing an entirely new line of products, experts say. In such instances, their backgrounds and perspectives can be invaluable.

"If you simply just don't have the people in your organization to launch a new initiative or go in a new direction, that may be a reason to go outside," says Henman.

It also depends on the organization's situation, Reinhardt says. "If the organization is running well and the president is retiring and the company wants to continue in the same direction and there's a good candidate internally that understands the organization and has the drive to take it to new heights, then I would stay within," he says.

(Here are some tips for a smooth integration.)

Schalm says she has been toying with the development of a matrix that may be useful in determining whether to promote from within or hire from outside.

On one axis would be "developmental stretch" -- the extent of reach necessary for the employee to effectively perform the job duties. On the other is "integration complexity" -- the extent of the challenge involved in fitting into the organizational, industry or geographic culture(s). The bottom left quadrant is the sweet spot, she says.

"When you start to go outside of either of those axes, it becomes more complicated." And, she cautions: "you definitely don't want to put someone in a situation that requires a developmental stretch and integration complexity at the same time."

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