How to Know When to Hire Internally and When to Look Outside

Finding and retaining top talent is a never-ending battle in a market as competitive as IT, which according to BLS stats boasts a 3.5 percent unemployment rate compared to the national average of 7.5 percent. A well-planned recruitment and retention program is the difference between success and failure. "Always be recruiting," says Ron Lichty, co-author of Managing the Unmanageable, "We consider recruiting and hiring to be the most important tasks a manager has."

[ALSO: 10 trends shaping IT hiring in 2013]

Hiring the wrong person, whether it's due to a bad cultural fit or skillset, can have a huge impact both in your department and on the company as a whole. In a recent survey by Harris Interactive conducted on behalf of CareerBuilder, 6,000 multi-national hiring managers and human resource professionals were asked to estimate the effects and costs of a bad hire. The results may surprise you:

27 percent of U.S. employers reported a single bad hire costs more than $50,000.

29 percent of those surveyed from Germany reported that bad hires cost $65,231 or more.

27 percent from the U.K. say a bad hire costs more than $77,849.86.

29 percent of Indian employers reported the average bad hire cost more than $37,150.

48 percent of employers in China say a bad hire cost on average $48,734.

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Traditionally, according to Dan Schawbel, author of Promote Yourself: The New Rules For Career Success, hiring externally was preferred. Companies like the idea of hiring people away in an effort to infuse the company with new talent, perspectives and ideas--not to mention insider data from the other team--but as the economy turned down in 2008, companies began to look for ways control costs and hiring internally started to make more sense.

4 Reasons to Hire Internally

1. It Costs Less

Most companies are struggling every day, trying to do more with less and that includes HR. As it turns out, hiring internally is cheaper. According to data from the Saratoga Institute, it costs on average 1.7 times more to hire externally than internally ($8,676 vs. $15,008). That's a difference of $6,332. Saving money is usually close to the top on everyone's list.

Another study, from Matthew Bidwell, assistant professor at Wharton, titled Paying More to Get Less: The Effects of External Hiring versus Internal Mobility, also found that external hires make on average 18 percent more than internal hires.

2. It's Faster

Lost productivity from an open position can cost major dollars depending on the position. Having an internal pipeline of talent makes hiring more fluid. It typically takes three meetings to hire externally, according to Schawbel: one phone or Skype interview, then one in person and then the final interview.

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"The hiring process is much quicker. With an internal hire it can take a few weeks but with an external hire it can take months," says Schawbel. If you hire internally you already have a reputation and performance record. There's also no background check needed, notes Schawbel. Another consideration: It takes internal hires less time to get up to speed. They already have a solid contextual knowledge of how things are done and a network to help them do it.

"You don't have to devote as much time to training--the person already knows the environment--so you can focus purely on getting him or her up to speed in their new role," says Tracy Cashman, Partner and General Manager in the Information Technology Search division at WinterWyman.

3. Hiring Internally Builds Morale

"You can be a hero if you consistently look to promote or hire from within. The best managers are always looking for ways to enhance their staff's careers," says Cashman. The top talent is not only concerned about doing the best job possible they are also concerned about their career trajectory.

One of the top reasons people leave their job is because they feel there is no room for advancement. However, when there is a career path and clear expectations on what it takes to get to the next level employees will have less interest in moving on. "It helps with retention; employees see a path upwards and job security. That loyalty is rewarded," says Doug Schade, principal consultant, technology search at WinterWyman.

Another salient point: An internal hire is already a known quantity. "You already know the person fits the culture; otherwise, you wouldn't be considering them," says Cashman.

4. Internal Hires Have a Better Success Rate

The Saratoga Institute study also revealed that 40-60 percent of external hires aren't successful in their new role as opposed to 25 percent hired internally.

The research done by Bidwell agrees, reporting that external hires receive lower performance reviews for the first two years of employment. Bidwell's research indicates it takes this long for external hires to build an internal network and to learn the inner workings of the company. The end result is that internal hires reach their potential faster.

Bidwell's research also indicates that there is 61 percent higher rate of terminations/layoffs and a 21 percent higher rate of voluntary exits for externally sourced employees. Numbers like that demonstrate one of the reason companies may want to start building an internal talent pipeline.

3 Reasons to Hire Externally

1. Finding the Right Skillset for the Right Job

"If you have an open or newly created position and just don't have the talent in your organization to support that position, then you have to go externally," says Schawbel.

Perhaps the cost in time and resources to get someone up to speed for particular role may be more than you can afford. "Productivity can stall with multiple internal employees learning new roles or taking on new work to help facilitate the change," says Schade.

For example, maybe you only have one Java developer. If he/she moves on, is it easier to train a .NET person to learn Java or bring in a new Java person? "If it's a niche or particularly important role, sometimes you are better off trying to get someone from the outside rather than spending time and money on training," says Cashman.

2. Getting a New Perspective

Today's CIOs and IT pros are expected to be agents of change. In a situation in which a company is looking to make a paradigm shift in how it approaches certain aspects of the business, it may opt to hire externally. "Fresh blood can often revitalize a team, and it's good to bring someone in who has new ideas and a different perspective," says Cashman.

3. External Hires More Experienced and Better-Educated

External hires normally have more experience and have a higher level of education, according to Bidwell's research. The study also indicated that although external hires are at a higher risk of failure, the ones who do make it through the first two years are promoted faster than those hired internally.

What Does It Take to Hire Internally?

To be successful at hiring internally, Schwabel says, you need two things: a solid corporate culture and the right people. "Companies have to focus more on corporate culture and company branding in order to attract and maintain the best people," he says. Once that is in place and you have an internal hiring program that is supported and communicated to the employees your retention should increase, according to the experts.

Create a Long-Term IT Hiring Plan

Creating an internal hiring policy takes time and C-level buy-in. It's a long-term approach to better retention and cost savings. In the real world, however, the state of your corporate culture as well as the business and technological objectives you face all play a part in the decision to hire internally or externally.

Whether you choose to go external or stay inside the company, the bottom-line is to get the best people and retain them. "The best way to hire the right people is to communicate your brand online and offline through all the touch points and to also have a strong corporate culture so when people get there, they want to stay," says Schawbel.

This story, "How to Know When to Hire Internally and When to Look Outside" was originally published by CIO.

Copyright © 2013 IDG Communications, Inc.

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