Hire talent from inside or go outside? (By Peter Cappelli)

One of the most fundamental choices that employers make is whether to develop talent internally by promoting from within the organization or to hire talent from the outside. Large employers, in particular, have shifted their approach in recent years and now rely much more heavily on outside or lateral hiring.

The prevalence of outside hiring can be seen in the exploding use of search firms and job boards, and in the growing rates of voluntary turnover in organizations — most people who quit do so for jobs elsewhere.

The outside hiring trend contrasts sharply with the dominant model of previous generations: reorganizing firms by retraining and relocating existing employees into new roles. Lifetime employment models, popular in Japan and present in the United States, were essentially based on this retraining and relocating approach.

Factors boosting outside hiring

Several factors appear to have increased the use of outside hiring. Foremost among them is the commonplace notion that the pace of change that businesses must accommodate has quickened over time. Rapidly responding to changing markets demands new strategies and new people with the competencies to execute those strategies. The amount of change is often too great to accommodate just by retraining and relocating existing workers.

New infrastructure, such as search firms and job boards, has also made outside hiring faster and easier. And some employees in large corporations are now more resistant to relocations that might allow them to stay in the same corporation, even in a different position.

Inside or outside: How to decide

How should you decide whether to go outside or promote from within to fill a vacancy? The simple answer — choosing the path that produces the best candidate — leaves unresolved the question of what one means by best and can lead to further problems in the long run.

Hiring from the outside often looks like the easier option. Outside hires bring the organization new perspective and the experience and credibility of having done similar work. In some cases, these attributes are essential. It makes sense to use outside hires when internal promotion systems don’t work, but hiring from the outside also requires competencies at which few employers excel.

Both identifying strong applicants and selecting the right person from the applicant pool require unique skills and systems. Turning the problem over to a search firm provides only a partial solution because the truly important decisions — defining job requirements and selecting among candidates — still have to be made by the client.

Even the best selection process leaves employers with a great deal of uncertainty as to what outside candidates are really like. Outside hires typically cost more as well, and their hiring creates morale and turnover problems when internal candidates are passed over.

Promoting internally can add motivation, reduce costs

Promotion from within, in contrast, provides opportunity and motivation for those in lower-level jobs and can also be less costly. Internal promotion avoids the costs of an outside search, and internal candidates typically can be paid less, at least until they have proven themselves.

Developing systems for assessing internal talent and maintaining the job ladders for promoting from within are big investments. It makes sense to put them in place where:

* Operations are reasonably stable.

* The number of jobs is large enough to make the investment in systems pay off.

* Jobs form some natural hierarchy in terms of skill and responsibility — for example, where the director performs duties similar to those of the manager but with greater responsibility and greater expertise.

You should start the process of deciding whether to hire from the outside or promote from within by determining which jobs can best be filled through internal promotion and which should be filled from the outside.

Consider employee morale

Hiring the best candidate for the vacancy in question should not be the sole overriding principle. If you have an internal promotion system, you will do considerable damage to it and to the morale of employees by overriding internal candidates and hiring someone from the outside who seems better.

Resist the bias toward outside candidates. They often look better than internal candidates, in part because we know the faults of existing employees but know only the best attributes of outside candidates. Decide in advance which jobs should be filled internally and which externally, and then stick to your decision.

When you decide to hire from the outside, be clear why you are doing it, and follow through to make the best use of that employee. For example, if you hire someone who has knowledge that you want shared with your organization, then you need to design that person’s job accordingly.

Two ways to minimize outside hiring

There are two established approaches to minimizing the frequency of outside hiring. The best known is the “core-periphery” model, based on the notion that firms have certain core employee groups that need to remain stable. You can accommodate ups and downs in business demand by shifting the workload fluctuations to groups of contingent and peripheral workers outside the core, whose skills are easier to replace. One example might be to use contractors to handle demand spikes associated with short-term projects.

The second approach is to use cross-functional teams and other innovations that decentralize authority and allow for local adaptations to changing demands. The idea here is that outside hiring is often used to fill gaps in the organization in order to meet new demands that are not being addressed by the current organizational structure and job descriptions.

Flexible arrangements reduce layoffs

Organizations with flexible internal work arrangements can accommodate changing demand without having to hire new talent from the outside. The added benefit for employees is that these arrangements also reduce the need to lay off those whose job titles no longer fit the organization’s changing needs.

About the author Peter Cappelli is the George W. Taylor Professor of Management at the Wharton School, University of Pennsylvania, and is Director of Wharton’s Center for Human Resources