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Why You Should Hedge Your Bets On External Hires

Hedge Your BetsPicture this: You are searching on LinkedIn and find what seems to be the perfect candidate for that open position in marketing. They have 5 years of experience, a great portfolio, and an MBA. But could the marketing specialist sitting in the cubicle across the room with a flair for writing, solid graphic design skills, and a strong work ethic actually be better suited for the job?

Hiring managers tend to overestimate the value of external hires over internal recruiting of talent. This can be due to human nature (once we have experienced someone doing one job it can be hard for us to imagine them doing another) and partially due to a lack of process to grow and market internal talent. You may be better off hiring from within, according to experts. Here are three reasons why you should analyze your internal resources before you shop around for new talent:

1. The market may not have what you need

Critical roles often have specialized skill sets that need to map back to internal corporate culture and processes. For example, for companies with specialized technical staff, it can be difficult for hiring managers to find these skills when sourcing talent from outside the organization.

Senior positions are no exception. Leaders often require a set of attributes that are unique to their organization’s culture and industry. A study found that top performing S&P non-financial companies that significantly outperformed other S&P 500 companies consistently had homegrown CEO talent.

2. Success is often produced by the team, not always the individual

Great performers are often the product of their environment. It is important to understand the full context driving performance: An in-depth study of 1,052 high performing stock analysts who worked for 78 investment banks in the United States from 1988 through 1996 found that when organizations hired star performers from outside the organization, three things happened: the star’s performance faded quickly, group morale took a hit, and the company’s valuation suffered.

A resume boasting an outstanding sales record may actually have more to do with market conditions, supporting staff, and effective business strategy than the individual’s performance. A star performer will not necessarily recreate their success in a new position without all the supporting factors that contributed to that person’s output.

3. External hiring can get you less for more

External hires often perform less well and cost more money. According to research published by the University of Pennsylvania, external hires “get significantly lower performance evaluations for their first two years on the job than do internal workers who are promoted into similar jobs. They also have higher exit rates, and they are paid… about 18% to 20% more.”

What is the better approach?

Acknowledge that accessing the talent marketplace is not the only solution to talent gaps. Organizations need to value long-term talent growth as a supplement to hiring externally. This can be challenging, because there is no instant gratification and it requires long-term thinking and dedication.

Specifically, you can:

  • Analyze your workforce to understand what turnover patterns are present. Look beyond the numbers and examine the key characteristics of the people leaving to understand what tangible steps you can take to prevent resignations.
  • Honestly assess and, where necessary, improve company processes and procedures related to hiring. Many companies, while officially supporting internal movement, informally discourage this as it is perceived as “poaching” between managers or otherwise causes internal friction.
  • Flag critical roles and understand the unique skill requirements, while analyzing the turnover trends and reasons driving attrition for these positions.
  • Build a long-term approach to managing these critical positions and developing talent pipelines internally so that you are not left relying on external hiring as the only solution to talent gaps.
  • When the market is the best solution, plan proactively for the costs and risks associated with this approach.
  • If a particular company is famous for producing star talent, research the cultural and operational factors that enable people to succeed there, and determine to what degree these can be adapted to your organization.
  • Use predictive modeling to forecast turnover (especially for critical positions) so you can start building talent pipelines early with proactive workforce planning.
  • Overlay with estimates for where your business is going and what talent demand you will have.
  • Consider the 6 Bs when considering how to invest in talent (from David Ulrich’s RBL group) to get the full spectrum of options available to you

This will enable organizations to use a balanced approach to talent acquisition that leverages both hiring external talent quickly and growing internal talent over the long-term, keeping costs under control while addressing your talent gaps.

About the author: Dave Weisbeck

Dave enjoys problems that require both logical and creative solutions, and thus exercise both his left- and right-brain. He started out his career in the 90s writing code as a computer programmer, and then moved on to product management, marketing and general management roles. Dave has a strong background in analytics, having played a key role in the analytics businesses at SAP, Business Objects, and Crystal Decisions. At Visier, he looks after product and market strategy. A proficient do-it-yourselfer (he made his own PVR for fun), Dave’s hobbies include the logical and creative challenges of cooking, home brewing, and photography.

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