Train or Hire?

The world is full of smart, capable people with enticing resumes. One could get easily tempted to snag some of this talent for their business. But that in-house candidate waiting for his promotion would perform better for less money than that fancy-sounding external candidate.

People hired into the job from outside often have more education & work experiences compared to the internal candidates, and hence are generally paid more. Professor Matthew Bidwell from Wharton B-school suggests in his research that when one knows less about a person, he or she is more rigorous about the things that one sees, but they are reasonably weak signals of how good somebody will be on job. Over the past few decades, companies have turned away from offering lifetime employment in favor of relying on the external labor market to fulfill their needs as and when they arise. This throws open the gates of internal mobility versus external hiring processes once again.

According to Professor Bidwell’s research, the external hires get significantly lower performance evaluations for the first two years on the job than internal workers promoted into similar jobs. The external hires also have greater exit rates and are paid substantially more. However, if these external hires manage to stay beyond two years, they get promoted faster than those who were promoted internally. He says that companies should understand that it can often be harder than it seems to bring in people who look good on paper, because often the grass is always greener on the other side.

Promoting an internal candidate to fill up a vacant opening in a company has its own advantages. By doing so, the role gets filled quicker; the company and other employees are well aware and acquainted with the person while it also sends out a positive signal to all the others in the organization that their hard work and dedication would let them realize the potential to progress and move up the ladder. However, if the potential of being able to perform and grow into the new role, of an existing employee is misjudged, not only a huge amount of effort & time would be wasted, relationships are ruined, everybody involved undergoes a lot of stress and may even lead to losing employees. It could also promote a somewhat fake belief in the minds of other employees that I am next in line for promotion irrespective of how deserving they really are. The skills that are important to the job in hand are of utmost importance. Large changes in the nature of jobs, even when occurring within the organization are generally found resulting in performance declines. Moreover, these days, companies are so busy training the employees for their current job and extracting the best out of them in the present moment, that they forget to keep the future in mind and miss out on training them for a probable succession keeping a long term perspective in mind. Companies also do not show the employees a clear line of growth that they could have in the organization when they join, missing out on cultivating any ambition to succeed their superiors in the employees themselves.

In contrast to this, hiring employees from outside will often bring a fresher perspective to the business and may lead to pointing out some changes required and help in learning more. However, on the minus side you don’t know the people you are hiring as well as you know somebody who works in your own company. When firms and potential employees are looking to join hands, it is a difficult process for both parties, since both have highly incomplete information about each other. The firms struggle to evaluate the applicants and the applicants struggle to know which of the available jobs would best suit their preferences and abilities.

Companies need to work hard about fostering a culture that develops internal talent and promotes from within, supported by a learning and development function. Succession planning should be seriously carried out and individuals having high potential should be flagged early on for such purposes and trained accordingly. Companies who already do this should be proud of themselves, because doing this is no easy job.