Growing companies have a need for new employees to fill new or expanded positions. Even a company that has a stable workforce needs to replace existing employees who change employers or retire. Employers are faced with the decision about whether it makes sense to seek out a new employee from outside the company or to promote one from within. There are pros and cons of each choice, and, ultimately, the employer must weigh them for the particular company and industry.
Spending the money to train an existing employee for a promotion often pays off. Much of the risk of hiring is mitigated because the employer already knows the employee. The employer has experience with the employee's work ethic, ability to work with others and problem-solving skills. Current employees often cut down the learning curve because they understand the company, the way it operates, what it sells and the management structure. In companies with highly specialized products or services, this can cut down on the ramp up time needed to get a new hire up-to-speed. Hiring from inside also reduces the hard costs of hiring. These include the time involved in background checks, setting up payroll, signing up for healthcare and other internal benefits, and other administrative set up costs. An internal candidate also doesn't incur moving and relocation costs, which are sometimes paid for by the employer.
Bringing in someone from the outside adds something to the company that an internal candidate cannot: new knowledge and skills. External candidates may have experience with new ways to operate or a new perspective. The knowledge they bring with them adds to the company's overall intellectual capital. A new fresh face can often energize a tired and unmotivated workforce and improve the overall productivity in a company.
Employers often hire from the outside when they are looking for significant changes to their operation. Hiring away from a competitor gives employers insights into the industry they may not have acquired otherwise. It also gives employers a focus for changes in strategic direction.
The "Soft" Issues
The decision to hire from within or without hinges on more than just a tallying of the costs of the hire. The way a company handles its employee acquisition can have a major impact on the way a company is perceived by both employees and external stakeholders. Companies that have rich training programs and have a history of developing and cultivating their existing workforces are viewed as employee-oriented and are likely to attract higher quality external applicants.
On the other hand, having internal candidates vie for a single position can result in animosity and hurt feelings, which may intensify if the successful candidate is now in the position to manage other candidates.
Which Is Better?
Each company's particular situation will dictate its choice of hiring direction. Companies that are staying on the same strategic track often hire from the inside. Those who are looking for a shakeup may choose to seek out a new face. Part of the decision will be based on whether there is a suitable internal employee. In some cases, it would take longer for a company to bring someone up through the ranks than to helicopter someone in who can hit the ground running.
The Bottom Line
Deciding whether to hire internally or externally is based on many considerations, and not all of them are financial. Each company must determine through experience which is the best road for its operations. While it is often more cost-effective to hire an existing employee, there are good reasons to consider an external candidate.