Weighing Internal vs. External Hires

When hiring, it’s not always clear whether you should cast a wide net or go with who you know.

By Eric Krell Jan 7, 2015


010215_cover.jpgWhen hiring, is it better to build from within or “buy” from the external job market?

The question is undoubtedly important, but it may not be the most critical one in determining if a person in a new position thrives or flames out.

“ ‘Do we build it or do we buy it?’ is a useless debate in the 21st century because you have to do both,” says Harvard Business School professor Boris Groysberg. His book Chasing Stars: The Myth of Talent and the Portability of Performance (Prince­ton University Press, 2010) contains comprehensive research on external vs. internal hiring. “It’s not whether you build or buy, it’s figuring out under what conditions you build or buy,” he maintains.

Daniel Sonsino would agree. He is vice president of talent management at Polycom, a San Jose, Calif.-based voice and video communications company that has about 3,500 global employees. Three years ago, Polycom filled roughly 75 percent of its open positions via external hires. That figure has decreased to about 40 percent since Sonsino began to get his recruiters to “think inside first” when filling positions.

Internal hires retain organizational knowledge and get up to speed in their new roles more quickly than external hires. “Hiring internally also increases engagement. And folks tend to refer others more frequently when their own career has grown within the organization,” Sonsino says. “We’ve seen that pretty consistently.”

Despite those advantages and despite the disadvantages of external hiring, such as higher costs and a longer ramp-up period, Polycom remains firmly committed to a build-and-buy approach.

The key to determining whether it is best to build or buy occurs long before a hire is made: The first step involves taking a diligent approach to workforce and succession planning.

And what occurs after the hiring decision—during onboarding, or the “integration” process—is equally important.

Many companies “throw a ton of effort into finding the right person, negotiating and getting to the finish line,” explains Greig Schneider, U.S. managing partner of global executive search company Egon Zehnder. “That’s not the finish line. That’s the starting line.”

Pros and Cons

Roger Ahlfeld has a fresh—and personal—appreciation for the pros and cons of hiring external candidates. Ahlfeld, vice president of human resources for Tedeschi Food Shops in Rockland, Mass., joined the company with roughly 2,400 corporate and franchise employees a little more than a year ago. He went through a lengthy interview and selection process that carefully assessed his fit with the family-owned company’s culture.

“Cultural fit is the most important factor when you are considering hiring somebody externally,” Ahlfeld explains. “When you promote people internally, one of the biggest advantages is that they already know how to work in the environment.”

Larry Nash, the Pittsburgh-based director of experienced and executive recruiting for accounting and consulting company EY, agrees. “Internal candidates have a strong knowledge of our culture, processes [and] methodologies, and have many relationships throughout the organization,” he notes.

It is usually faster and less expensive to promote from within. University of Pennsylvania Wharton School professor Matthew Bidwell’s research on hiring decisions in the investment banking industry shows that external hires earn 18 percent to 20 percent more than existing employees promoted to similar positions.

But external hiring delivers advantages, too, including injecting fresh ideas and new skill sets into a company. It also allows the hiring manager to draw from a larger supply of candidates. Yet these benefits do not always translate to successful hires. Bidwell’s research shows that the same external hires who receive higher salaries are also given significantly lower performance evaluations during their first 24 months at the new company compared to existing employees promoted to similar roles.

This performance gap may occur because hiring managers and HR professionals tend to rely too heavily on education, past job experience and previous job titles when recruiting rather than gauging whether such candidates will actually be able to perform in a specific position or within the culture into which they’re being hired. “I would much rather know the intangibles,” Bidwell says, including how quickly a candidate can assess and integrate into a new organization’s culture and how effectively he or she can forge healthy relationships with new co-workers and amass the social capital necessary to get things done.

18%-20% How much more investment banking companies pay for external hires compared to the cost of internal promotions for similar positions

Source: Wharton School professor Matthew Bidwell.

20%-25% Proportion of experienced positions filled internally at accounting and consulting company

“New hires need to figure out who to talk to to accomplish a specific task,” Ahlfeld says. “That person is not always who the organizational chart points you to. Sometimes you need to know, ‘OK, if I want to do this, I actually need to talk to that person’s assistant.’ ”

Hiring organizations also tend to overestimate the “portability” of skills and experience—how effectively and easily they can be applied in new organizations. Groysberg has conducted extensive research on hiring decisions in the financial services industry. He chose to examine the build-or-buy decision in that industry in large part because many banking roles and skill sets are widely considered to be highly portable: A star industry analyst at Goldman Sachs should thrive at JP Morgan Chase or Morgan Stanley, the conventional wisdom holds.

“A lot of my research looks at what happens to stars when they join [new] companies,” Groysberg says. “The stories are not great. Many of them underperform because what makes them successful are the companies that they used to work for. … Everybody likes to hire from Goldman Sachs, but the reality is that Goldman Sachs is a very firm-specific place.”

The late human capital pioneer and Nobel Prize-winning economist Gary Becker used the term “firm-specific” to distinguish between general skills (e.g., writing great reports on investment opportunities in the retail industry) and the unique skills required to thrive in an individual organization (e.g., how to use a home-grown information system). Groysberg’s research suggests that the more firm-specific the required skills are, the more difficult it is for external hires—even superstars—to replicate their previous levels of performance.

Other Considerations

The decision to hire internally or externally can vary based on the nature of the role (e.g., does it require substantial collaboration, are the skills requirements unique to the company or industry?), the internal supply of talent, the organization’s strategy, changes occurring in the organization’s marketplace, and more.

“In highly evolved organizations where succession planning and performance reviews happen regularly, and transparency of hiring practices is the norm, looking to internal candidates first is natural,” says Laura Randell, CEO of global recruitment strategy and HR technology consulting company PeopleMatters. However, in corporate cultures where those processes are not in place, or are inconsistent or misunderstood, the opposite may be true. “Then the first step is to look externally, because there is no way to know who might be the best person in the organization for the role. The assumption is that they don’t exist, or it’s easier to just look outside,” Randell says.

Where to Look For Your Next Great Hire

There’s no one-size-fits-all approach when it comes to deciding whether to hire externally vs. internally, but experts point to general scenarios when it may make sense to consider one approach over the other

Look Outside Look Within
  • Tough corporate turnarounds or strategy shifts are underway.
  • Succession planning and performance information is inconsistent, absent or hard to access.
  • Specific skills are needed that are not readily available within the organization.
  • The organizational culture welcomes multiple perspectives.
  • Processes are in place that support job training and full integration into a position.
  • An organization is thriving.
  • Succession planning and performance reviews are consistent and transparent.
  • An abundance of firm- or industry-specific skills are required for the job.
  • A unique and strong organizational culture may be hard to understand or fit in with.
  • No or few processes are in place to support job training and integration into a position.

Where a company is in its business cycle is also an important consideration. When a company is thriving, for example, it usually builds on existing strengths. During this phase, internal candidates tend to be a better fit.

“When companies are in tough turnaround mode, or require a significant shift in strategy due to disruption in markets, they should think more closely about external candidates,” says Bob Damon, executive chairman for the Americas at global executive search company Korn Ferry International. “The internal talent may not always have the specific skill set required. Or they may not have the courage to disrupt legacy thinking and relationships. When organizations look to an external candidate, it is often because they need specific skills not already available within the company.”

Better Building And Buying

When approaching the question of promoting from within vs. searching externally, HR needs to understand its own talent supply and hiring biases as well as the importance of carefully crafted job descriptions. The following practices can help foster that understanding:

Start with succession planning.Get a clear understanding of the talent that is currently available inside the organization. “Take succession planning seriously,” says Scott Olsen, a New York City-based principal in PricewaterhouseCoopers LLP and U.S. leader of the HR services consulting practice. When companies opt to hire externally, they should do it “for the right reasons rather than because they don’t have a robust internal pipeline,” Olsen says.

EY strengthens its existing pool of internal candidates by moving them into different roles to help them gain new experiences and responsibilities, according to Nash.

At each of Polycom’s quarterly business review meetings of top executives, Sonsino shares the latest hiring and retention figures, highlights notable internal promotions and external hires, and seeks input on expected talent needs throughout the company. This helps his team pursue what he describes as a “thoughtful and predictive” approach to workforce planning and succession planning. It gives them time to determine whether there are enough people in-house with the needed experience and/or whether they have enough time to develop the needed skills.

Recognize biases. “Are you looking to hire internally because you are under pressure to do so?” Randell asks. “Does it feel safer to hire someone you know, rather than take a chance on an external person? Ask yourself if hiring internally is a standard approach across the organization, and, if it is, whether it should be and why.”

Conversely, Sonsino and his team conducted a self-analysis two years ago and discovered that the company’s internal recruiters tended to look externally first—often to their own outside networks and on LinkedIn. To change that mindset, Sonsino instituted incentives for his recruiters to think inside first.

Polycom also developed an internal career fair where recruiters staff tables at headquarters outside the cafeteria to share job and career information while nurturing their internal talent network. The talent management team also posts articles and profiles highlighting recent internal hires on the company’s internal social media platform.

16% Proportion of Polycom’s open executive positions filled by internal employees in early 2012

42% Proportion of Polycom’s open executive positions filled by internal employees in late 2014

Describe the role clearly.Schneider at Egon Zehnder advises HR professionals and hiring managers to write job descriptions that are “extremely rigorous about exactly what skills and competencies” an open role requires. The description should clearly and comprehensively state what a person needs to be successful in the role.

Randell agrees. “Many organizations go to market with corporate speak and requirements that no external candidate would understand or have,” she explains. “As a result, many great people won’t even apply. Having a clear approach to job evaluation, job posting and candidate assessment makes the process simpler for everyone, and ensures the best people are hired.”

Understand what is unique about the role and the organization. Separate research conducted by Groysberg and Bidwell concludes that, while organization-specific skills requirements pose a major challenge for external hires, unique and strong organizational cultures pose similar challenges.

Ahlfeld at Tedeschi Food Shops balances considerations related to the company’s culture and the unique nature of the role that needs to be filled. For example, the rapid changes occurring in both information technology and marketing mean it makes sense to consider external candidates when a chief information officer or top creative position becomes open. Ahlfeld stresses that cultural fit would remain the most important criteria in hiring an external head of creative. But he would be more inclined to bring in an external person armed with new thinking and then ensure that the integration process focused on imparting the cultural history of the company to that new hire.

Commit to integration.Whether a new hire is stepping into a role from another company or from another area of the same organization, pay attention to integration. “There are many ways that a [new hire] can make a few false steps and get into trouble,” Schneider says. “These mistakes can be avoided with proper integration.”

For many organizations, that means expanding onboarding efforts well beyond assigning desks and laptops, delivering employee handbooks, and reviewing benefits.

“Very few companies spend any meaningful time on integration,” Groysberg asserts. He suggests that a good start to improving onboarding would be to distribute a brief profile of the new hire to all colleagues, immediately place the new hire on a cross-functional team where fresh perspectives are particularly valuable, and have the new hire’s CEO (or supervisor) schedule monthly lunches with him or her for at least four months.

“In the past 50 years, there has been so much research and substantial focus on selection,” Groysberg says. “Should we do job descriptions or not? Should we interview candidates one-on-one or with teams? Should we hire from the outside or inside? … I think in the next 30 years, companies will need to get much more serious and sophisticated about integration.”

Eric Krell is a business writer based in Austin, Texas, who covers human resource, finance and marketing issues.


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