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.

SEE: The Cost Of Hiring A New Employee

Internal Candidates
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.

External Candidates
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.

SEE: 4 Common Questions About Hiring Staff

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.

Related Articles
  1. Investing

    The 8 Best Business and Finance T.V. Shows

    With so many talking heads to choose from, which is the right show for your business and money matter needs? We review the best shows on now.
  2. Active Trading Fundamentals

    The Biggest Private Equity Firms in San Francisco

    Learn about some of the larger private equity firms with a presence in San Francisco, including KKR, the Blackstone Group and Warburg Pincus.
  3. Active Trading Fundamentals

    The Companies of Peter Theil's Founders Fund

    Learn about the major public companies that Peter Thiel has invested in and companies that are on the verge of going public at multibillion-dollar valuations.
  4. Active Trading Fundamentals

    The Biggest Private Equity Firms in Los Angeles

    Learn why Los Angeles is a thriving market for private equity, and identify the five largest private equity firms operating in the city.
  5. Entrepreneurship

    What Does Bootstrap Mean?

    The term bootstrap refers to launching and building a business with little capital and no funding from outside sources.
  6. Economics

    Explaining the Balanced Scorecard

    A balanced scorecard is a metric that measures a business’ performance.
  7. Professionals

    Small RIAs: How to Level the Playing Field

    In order to compete with larger firms, small RIAs have to get a little creative. Here are a few ways to kickstart growth.
  8. Entrepreneurship

    Top 5 Startups That Emerged in Denver

    Learn why Denver is one of the hottest markets in America for startups, and identify five of the top startups that are emerging from the Denver market.
  9. Entrepreneurship

    How Does ClassPass Work and Make Money?

    Find out how ClassPass makes money, how the company aims to help both businesses and consumers, and why it has been so successful.
  10. Professionals

    What Kind of Insurance Do RIAs Need?

    Advisors spend a lot of time discussing insurance with clients but they also need to consider their own coverage needs as small-business owners
RELATED TERMS
  1. Corporate Social Responsibility

    Corporate initiative to assess and take responsibility for the ...
  2. Corporate Culture

    The beliefs and behaviors that determine how a company's employees ...
  3. Dividend Payout Ratio

    The percentage of earnings paid to shareholders in dividends. ...
  4. Venture Capitalist

    An investor who either provides capital to startup ventures or ...
  5. Outstanding Shares

    A company's stock currently held by all its shareholders, including ...
  6. Board Of Directors - B Of D

    A group of individuals that are elected as, or elected to act ...
RELATED FAQS
  1. What types of capital are not considered share capital?

    The money a business uses to fund operations or growth is called capital, and there are a number of capital sources available. ... Read Full Answer >>
  2. What protections are in place for a whistleblower?

    Whistleblowers can play a critical role in ensuring the compliance, safety, honesty and legal fairness of governments and ... Read Full Answer >>
  3. Can I buy insurance to reduce unlimited liability in a partnership?

    Partnership insurance is actually quite common. Most of the time, partners buy insurance to safeguard against the possibility ... Read Full Answer >>
  4. What are the benefits of financial sampling?

    Financial sampling allows auditors to approximate the rate of error within financial statements. For accounting purposes, ... Read Full Answer >>
  5. What are the benefits of prorating expenses?

    When a person prorates expenses between personal and business expenses, he is able to capture the maximum amount of tax benefits ... Read Full Answer >>
  6. What are the responsibilities of the principal in a company?

    Principals have different roles depending on the nature of an individual business, but the universal responsibility of a ... Read Full Answer >>

You May Also Like

Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!