Why do we prefer hiring from outside, despite knowing better? Bridging the Knowing-Doing gap in management of talent as an organizational resource
Pancham Dogra
Head of Human Resources at Times Internet; PhD Scholar in Strategic Management Area, IIM Kozhikode
Talent Decisions vs. Financial Decisions
While organizations often claim that "people are our most valuable asset," the reality is that talent decisions are treated with far less rigor than financial ones. This discrepancy stems from fundamental differences in how we can measure and account for these assets:
This comparison reveals why talent decisions can feel "fuzzy" compared to financial ones.
The lack of clear, immediate, and standardized measures for human capital makes it challenging for managers to apply the same level of rigor to talent decisions as they do to financial ones. Managers often believe that hiring "ready-made" talent from the market saves time compared to developing talent internally due to effort aversion bias.
While financial assets depreciate over time, human assets can appreciate through learning and experience. This appreciation is difficult to predict or quantify, adding another layer of complexity to talent valuation.
While external hiring can bring fresh perspectives, internal promotions offer numerous benefits that are often overlooked. In this article, I present a compelling business case for prioritizing internal promotions, using a hypothetical company scenario to illustrate the financial and cultural advantages, backed by research.
A Company Scenario:
Let's consider an INR 1000 crore turnover company with 3000 employees across 5 levels of hierarchy. Some other pertinent information is given in the illustration:
Now let us assume that a vacancy was created in the middle management band. We have two choices: hire from outside or create a promotion chain from within. The illustration below shows the costs and time impacts of both decisions.
The chart above shows some tangible comparisons:
1: The total cost of external hiring is almost double that of internal promotion. This has been accomplished by moving the position to the lowest band and promoting individuals within, which has decreased the expense of hiring and training new hires.
2. Faster Time-to-Productivity: External hiring decision’s time to full productivity is at least 1 month more than internal hire. Internal hires are already familiar with the company culture, systems, and processes. This results in a significantly shorter ramp-up time compared to external hires, leading to increased productivity and reduced productivity gap compared to the target productivity.
3. Improvement in other talent metrics: When employees see opportunities for growth within the organization:
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It boosts morale and reduces attrition
Improves employee lifetime value (ELTV).
Improves employer brand, which leads to lower hiring costs and improved quality of talent.?
Total Bottomline impact: Nurturing internal talent can help a company with revenue of INR 1000 crores ?generate 3.7% higher bottom line:
What can leaders do to bridge the knowing-doing gap?
Richard Makadok's 2001 work on resource picking and capability building provides a valuable framework for understanding the strategic importance of internal promotions. Makadok argues that firms need to excel to achieve superior performance, but capability building often offers a more sustainable competitive advantage.
Conclusion:
While external hiring has its place in a comprehensive talent strategy, a robust internal promotion system offers substantial benefits. From cost savings and faster time-to-productivity to improved morale and an enhanced employer brand, the advantages are clear. Moreover, by focusing on capability building through internal development and promotion, organizations can create a sustainable competitive advantage in their talent management.
By investing in employee development, creating clear career paths, and prioritizing internal promotions, companies can build a more engaged, productive, and loyal workforce while also improving their bottom line. The numbers speak for themselves: internal promotions not only save money in the short term but also contribute to long-term organizational success through improved employee lifetime value and the development of unique organizational capabilities.
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Call to Action:
How does your organization balance resource picking and capability building in its talent strategy? I will be eager to learn from your experiences and thoughts.
VP-Product Management (Pricing and Billing), Head BFSI Products | PhD Scholar: Ecosystems, Multi-sided Networks, Pricing Strategies
3 个月This is very nicely written Pancham Dogra. It is great to see an HR leader talk about these taboo topics. Be careful, HR community might accuse you of doing Harakiri of the HR trade craft. The illustration of bottomline impact is very nicely illustrated in this article. The "Halo Effect" occurs when the positive attributes of an external resource (such as a well-known brand or perceived expertise) lead organizations to overvalue it, even if internal resources are just as good or better. They attribute external resources with "fresh idea box", "new perspectives", "ready for job" etc. to justify their decisions. Somewhere i also believe that they don't know what they need to nurture talent and develop it. They find external hiring an easier way out. Ask someone who has tried to grow tomatoes in their backyard :) It is far easier and less frustrating (although less satisfying as well) to buy than to grow. The organizations sometimes choose internal talent development/promotions over external hires, but they don't go all the way. So they would promote the employee but not give the salary increment and other benefits that they would have given to an externally hired person. "Dry Promotion" is an even bigger killer.
Great example of how we can quantify and value each hiring vs internal capability action taken. Waiting for the day when you compile all your articles and publish a book /eBook :)
MBA IIM K || Product Program Manager at SAP || PMP
4 个月Nice Article Pancham
Strategic Transformation Leader. Data-Driven Growth Catalyst. Complexity Buster.
4 个月Great insights, Pancham and an even better read. Love “Effort Aversion Bias”. This is something I have actively called out, if not for anything else, at the very least a cost saving exercise, like you so rightly point out - 2X to hire externally than any internal promotions.
Legal Leadership and Global IP Head
4 个月Interesting!