I was teaching a workshop last week and made a comment that, in most cases, it is less expensive for an organization to promote someone from within than to hire someone from outside to fill a job opening. After the session one of the participants pulled me aside and asked me why that would be the case. Wouldn’t the costs of training and developing someone for a new role be more expensive, ultimately, than effectively paying someone else to do it? And it isn’t it better to hire someone with more experience in the job they will be doing than less?
These are great questions, and as I addressed them I indicated that there is certainly no one-size-fits-all answer to the question. However, there are a number of reasons why I do feel that, in general, the most cost effective workforces are built internally, as opposed to purchased externally. The most straightforward way of comparing the cost of the internal vs. external hire is to compare the total rewards package of employees hired into similar roles from inside and outside the business. However, this type of analysis, while useful, ignores a few critical variables that are more difficult, yet important, to quantify. For instance, how long will the newly hired position take to come up to full proficiency? What is the likelihood of failure in a role- and if the new employee fails, what is the cost to the organization of that failure?
Ultimately, what we have here is an information problem, and this is a major driver of the relative costs of each employee. For the internal employee, we have a lot of information. If they are being considered for a new role, they’ve likely been with the company for an extended period, and, as such, we know a lot about them. We have performance evaluations and general manager feedback. In many cases the hiring manager may know the employee personally.
In contrast, we know comparatively little about the external candidate for the same role. We’ve got a resume, a few interviews, and references chosen by the applicant. This impacts the cost of this employee in some keys ways:
- We’re more likely to over hire- Because we know less about this employee, we’re probably going to hire someone with comparatively more experience in the role, just so we can be sure they know how to do the job. As such we’re probably going to have to pay extra for this experience- even if we don’t need it. To hire someone with less experience is doubly risky- we don’t know if they can do the job or if they’ll be a good fit here.
- The employee still might fail- and then we’ll have to hire someone else. While this is also possible for the internal candidate, it is more likely with the external one, where questions of both fit and competency cannot be fully answered until the new employee shows up for work. We don’t have as many of these questions with the internal candidate.
None of this is to imply that hiring from the outside is bad; every organization needs to bring in new blood. Only that, on a job for job basis, the external hire will frequently be more expensive then the internal one, and many of these costs are likely to be hidden and/or difficult to calculate. As HR departments decide how much to invest in training and development to facilitate the career advancement of their employees, it is important to consider these very costs.
Tags: Build vs. Buy, Sourcing Strategy, Training & Development
Thanks for this post but I don’t agree! I think that the reason for this is that I place a greater value on the ability of a new hire to make me more money – and the external candidate (if I hire correctly) will be the best available in the industry – not just the best in the organisation.
I would argue that an external hire, while a more risky proposition, has the chance of being an exceptional person for the role and that this chance is also much greater than when hiring internally.
I think that if you find the right external candidate, then the quality of the work performed can be very much better. Isn’t that worth something?
I have hired a lot of people in my career and what I look for is a basic set of skills in the area(s) required but what I most want to see is an entrepreneurial spark, someone that is driven to succeed and smart enough to know that teamwork, communication and enthusiasm are required.
A personality helps as well
Steve,
Thanks for the comment. I certainly didn’t meant to imply that great people don’t exist externally (every internal hire was an external hire at one point), only that the information that we have on internal hires is much greater and that this serves to reduce the risk of hiring them. I’m interested in your comment that the chance of finding an exceptional person is better externally than internally. Why would this be? Because only lousy people have been hired before so the only supply of “exceptional” people is outside? Or exceptional people become less so having worked at the firm for awhile (I’ve certainly seen this happen)?
Is the only place you can find that “entepenerurial spark” ouside the firm, and if so why?
Just wondering. Again, thanks for the comment.
Interesting debate gentlemen. Rather than take a firm stand on either side, I might weigh in on Bill’s ancillary point that most firms have significant information gaps on external hires (and I would argue with internal hires as well).
Very few organizations can tell you with any certainty the sources of talent that are most cost-effective for them historically. Other questions that typically go unanswered are: which managers are best developers of top talent? Which career paths best accelerate development? Where on the career path do most employees stall? Where do high-performers tend to stall, and is it the same place as average performers? And so forth. The emerging science of Talent Flow Analytics will help firms answer these and other critical questions as they seek to optimize both the sources and flows of talent into and across the organization.