HUMAN RESOURCES / SEP. 15, 2016
version 18, draft 18

Internal vs External Recruitment: What Should You Use

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Frequently companies hire externally thinking that new candidates will bring a fresh perspective and new knowledge. Sadly, this is usually a mistake!

Often new hires have better education, more experience and a different outlook, compared to current employees. But, appearances can be deceiving. According to data gathered by a Wharton Business School research team, while external recruitment might seem appealing it is not as effective, efficient or cost-saving as internal promotion.

Internally promoting individuals comes with numerous benefits that aren’t immediately obvious. A quick assimilation into the new position and sensitivity to company culture is significant, as are working relationships based on long-term collaboration and successful communication.

Let's examine the benefits and disadvantages of internal vs external recruitment. Decide what you think is the better option!

Company Culture

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One of the biggest and most obvious benefits when promoting internally is that the employee is familiar and part of the company culture. They have knowledge regarding company protocol and the inner workings of the organisation. This translates to a shortened adaptation period and a faster turnover regarding productivity. Also, the employee you internally promote will preserve their work relationships within the company, further facilitating communication and productivity.

It creates an internal reward system within your company. If promoting internally becomes company policy, then lower level employees will aspire to be promoted, giving them a goal to work toward and a personal investment in the company. It will bolster morale and engagement, two items that rank high when it comes to employee satisfaction and retention. Many recruiters have also noticed that referrals increase when people are promoted within an organisation, giving companies a pool of candidates that they do not even need to search for.

But, sometimes company culture can have certain negative behaviours ingrained into it. These behaviours could include complacency, politics and gaps in communication. Bringing in a new hire, especially if it’s into an administrative role, may create the right conditions for reorganisation and hopefully quell many of these negative behaviours. If you need someone to enforce or enact difficult policies, then hiring someone externally might be the only feasible solution.

The reason internal recruitment could cause a problem in this situation is that their authority might not be taken seriously. If people have worked together for an extended period of time, it can be difficult for that person’s team to make the mental transition between he/she being their co-worker to he/she being their supervisor. This can create friction, frustration and hurt morale which can affect productivity.

External Recruitment is Expensive

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According to a study by the Wharton School of business, external hires (who are on average paid a lot more than internally promoted peers)were more likely to be terminated or leave of their own accord compared to employees that are promoted internally. The data shows that it has a significant effect: externally hired employees are 61% more likely to be terminated or laid off and 21% more likely to quit than their internally promoted counterparts.

The numbers are extremely worrying when put into context, but when put into financial terms the numbers are even more so. It can cost 16% of their annual salary to replace an employee that is paid under £30,000. For mid-tier employees, it costs 20% of their salary (with a salary over £40,000). And for highly educated and experienced senior management it might cost a company 213% of their senior executive’s wage to replace them. If you are paying your executive £100,000 per annum, then that means you would have to pay a crippling £213,000 to replace them. It also could take and external hire up to two years to reach their full capacity in a position.

Some say that even the aforementioned estimations are conservative; they speculate that training a new hire can cost a company two times the employee’s annual salary no matter what position they hold. On top of the obvious cost of training, this estimation can also include bonus packages and benefits. Compounding this effect; someone undergoing training will not have the same output as an employee that is fully trained. Thus there is a high risk associated with hiring and investing in an external hire’s training which could cost them a lot of money if they leave or do not perform well enough to be retained.

There is yet another factor that further compounds this situation, adapting to company culture. An increasing emphasis on candidate’s soft skills has been observed in many businesses’ recruiting priorities in recent years. One of these soft skills has to do with fitting in with company culture which is arguably one of the most important but simultaneously most challenging things for an external hire to do. Adapting to a new company culture can take between a few months to a year or more. 57% of externally hired executives report that it took them six months to start operating at full capacity in a new role.

Even at a conservative £100,000 a year salary for a senior executive, that means they were paid £50,000 while producing a fraction of work that equates to that amount of money. Also, the problems people can have fitting into in a new workplace can result in frustration or even worse an external hire leaving, taking with them thousands of pounds worth of training hours and labour hours paid.

Internally promoting on the other hand completely negates this risk. They are already familiar with the company culture, if they have been with the company long enough, they might even have contributed to it. The only obstacles an internally promoted candidate will have to overcome are ones related directly to the responsibilities of the new position that they were promoted to.

Knowledge of the Company

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Another unseen benefit of promoting internally is knowledge; you have access to a breadth of knowledge regarding the prospective candidate that you will not have when hiring externally. This includes, of course, hard metrics (if it is company policy) such as performance and efficiency assessments or reviews. Even soft skills which are incredibly difficult to discern in external hires like integrity, honesty and work ethic are usually known when promoting internally.

Granted these factors might not completely sway your decision, especially when the disparity of expertise or experience between the external candidate and anyone that might be considered for promotion in your team is large. If the gap of knowledge and experience is marginal though it could help you make a much more informed, educated and less risky decision.

Beyond this assessment of “intangibles” (soft skills that are almost impossible to ascertain during an interview process), an internal hire also knows the organisation of a company; this facilitates both efficiency and communication. They know which people are in which roles and who they need to speak to. Although external hires will eventually adapt to company hierarchy, you should expect a learning curve. Before making your decision, you need to take into consideration if this initial loss of productivity, and the inherent cost associated with it, will be mitigated in the future.

There is a third effect that might slip by even the most perceptive hiring manager’s attention, technology. If your company, firm or organisation uses specific technology, software or protocols unique to your workplace, then the learning curve for a new hire might be even steeper than expected. Although an external hire will be inevitably well versed in the skills and technology used at large in the industry, something that was created in-house might take them time to get used to.

An internal hire on the other hand, especially when their current position exposes them to items unique to the company, will be well versed in their use. This minimises both the need for training and the period of lowered productivity due to the unfamiliarity of the position’s “tools”.

Succession Planning

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Succession planning is something that not only helps when making your decision but will also assist the person transitioning into the position. It is critical if the position is key to the functioning or profitability of the company, where a disruption of workflow could carry a high cost, both monetary and in human capital (i.e. individuals leaving your organisation).  

Many Succession Plans stipulate that if a crucial position is vacated, that the department it falls under will temporarily fill the gap. This, of course, mandates that your HR department informs the individuals that will take the most significant burden and train the people that will be given tasks outside their field of expertise. Once the position is filled, the department or the individuals that assisted can become an ad-hoc support system for the new hire, until they reach their full capability and productivity.

As you can extrapolate from the aforementioned, the easiest way to fill a vacant position is by promoting the individual that has responsibilities that closely align or even overlap with the responsibilities of the position that was vacated. Having a succession plan will help you further assess the individuals that will be the optimal fit for a position that opens within your organisation.

Nexflix - Succesful External Recruitment

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So, it's clear that internal promotion has a lot of benefits. But, it's important to show the other side as well, an example of successful external recruitment to attract the best talent is Netflix. One of the biggest factors that ensure success is adaptability, Netflix throughout its relatively short, yet extremely successful life, has managed to pivot multiple times, each change proving more profitable and successful than the previous. They did so by attracting the industries brightest talent and separating ways with anyone that the company had outgrown. In fact, the individual that was at spearheaded this policy eventually became a victim of her own strategy.

Patty McCord said that in the early days of Netflix, when it was just a fledgeling startup sending out DVDs in the mail, there was a major reorganisation. Even though Netflix entire staff was made up of only 120-150 people, a third of them were laid off. When the company moved away from physical media and concentrated on streaming media, they let go of the entire engineering team that to a large extent built Netflix in its first iteration. Eventually after authoring a slideshow that emphasised talent opposed to blind hard work and firing hundreds of people as a result of that philosophy her high-octane approach to talent recruitment ended up causing her own termination.

When Netflix tried to pivot in 2011, separating their DVD mail and content streaming service, proposing an increase in the monthly rate for customers that wanted both services. Initially customers of the service paid $10 a month for the bundle of DVD mail rental and the streaming service. After the separation people would pay $7.99 a month for each, raising the price to $15.98. This resulted in the loss of 800,000 subscribers and a nosedive of 77% in the company’s stock price. Since McCord backed the plan, she was terminated. It is said that she is still very sensitive about the matter.

Interdepartmental Problems

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Reading this article you might assume that it has a bias towards internal hiring, compared to external, the truth is that it does lean in that direction but only because the data proves that it is more cost effective. Just as with any benefit, though, there exists a caveat; if the person promoted internally remains within their department, then there won’t be a significant and prolonged drop in productivity. If the position they are promoted to isn’t in the same department, though, their transitional period, marked by lower productivity, will be similar to an external hire.

Although you can assume that a disparity in knowledge is analogous in both cases, the reality is that at least the internal hire will be well adapted to company culture, which goes back full circle to one of the very first points of the article.

Another challenge presented by internal promotion compared to external hiring is the fact that many organisations have completely phased out middle management personnel in their organisations. This phenomenon is mainly due to corporate reorganisations that took place in the 80-90s terminating the majority of mid-level management; the remaining middle tier managers were unfortunately deemed redundant during the recession of the ’09.

This creates a large gap between employee level responsibility and senior or upper management. As mentioned above, it was after the 90s that external hiring compared to internal promotion gained traction within the HR community. It was not only due to increased mobility within the job market but also due to organisations simply not having middle management to promote into more senior positions.

Integration

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No matter what your decision regarding hiring be it internal promotion or external, something that should be high on your list of items is integration. When moving someone to a new position, they will need the infrastructure to adapt to their new responsibilities and demands of the role. This of course not only includes training but orientation and introduction to the team they will be working with. It will help make the transition as smooth and effortless as possible. Integration can include things as fundamental as supplies (paper, pens, etc.) to things as multidimensional and complex as the company’s missions, goals and core values.

Any company policies that pertain to what is considered appropriate behaviour, that extend beyond societal and professional norms should also be mentioned or given to the person in their new role. The process of integration should stand as a buttress to your succession plan; many of the elements of the succession plan will overlap with policies that help integration. Items such as on-going projects, long and short-term goals, along with milestones expected of the individual assuming the new role should all be touched upon to ensure a successful integration.

Again the most challenging part of integration is setting up the new dynamics within the company, who they collaborate with, who they will be working with closely and what is expected not only of them but of the people that work below them.

Decisions

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The decision to hire externally or to promote internally should be levied by the concurrent mission of the both the company and its corporate identity. These are some of the circumstances that should be significant factors when deciding:

Externally

  • An aggressive restructuring of corporate culture is needed.
  • When information that will help the recruiter make an informed decision about promoting internally is either minimal or completely absent.
  • There is a need for someone that has a skill set that is absent within your organisation.
  • The necessity for the diversification of perspectives or ideas.
  • When the company culture needs a fundamental shift.
  • Your company’s goals need to be revaluated and a critical pivot in the way business is conducted is necessary.
  • When the overall health of the organisation is at stake and only an external hire with a proven track record/portfolio can move the company/department in a positive direction.
  • A high level of adaptation is necessary.

Internally

  • When the position’s responsibilities overlap with the duties of a current employee.
  • Adaptation to the company’s culture is critical to the operation of the person in a specific role or position.
  • An employee has proven themselves as a leader within their department, and a leadership role becomes available.
  • An existing employee has acquired knowledge about their duties and/or role with the company, giving them the skill set to take on a more senior position.
  • A track record that aligns with the company’s goals and core values has been demonstrated and documented via performance reviews
  • A promotion is given to a valuable and talented employee to increase the chance of their retention with the company (when a position is available).
  • Your company is successful due to the diligence and hard work of your employees.
  • If the recruiter or HR department doesn’t have an integration or training programme for the position.

The last item on the list of factors to consider before hiring externally or promoting internally might seem frivolous, but it can be a costly lapse when hiring an external candidate. If you hire internally when there isn’t a training program, succession plan or integration policy in place, it will give you the time to develop one, while working with an individual that has proven they can communicate with you and is very familiar with the company culture.

If an external hire was put in such an ill-defined situation while having to deal with a new company culture and a completely new team, then their adaptation period might be lengthened considerably.

Your company’s policy regarding external recruitment or internal promotion can also inadvertently reflect the way the company treats its employees. The way your company is externally perceived can go as far as affecting your company’s ability to recruit new talent. If you develop the reputation for not promoting and only hiring externally, eventually you will not only find it challenging to attract new recruits but also retain employees that you value.

Are you a recruiter? What is your company’s policy when it comes to internally promoting or externally hiring? Have you found one or the other to be more effective? Please let us know in the comment section below.

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