Hiring Internally vs. Externally

To hire from within or not to hire from within? That is the question. In search of an answer, I interviewed three people with extensive knowledge and experience on the subject: Erin Pitera, CEO and co-owner of FMP with 15 years of tenure; Jeff Kidwell, a managing director at FMP with over 30 years of experience in consulting and professional services; and Dr. Reeshad Dalal, a Professor of Industrial and Organizational Psychology at George Mason University (GMU) and a Fellow of the Association for Psychological Science (APS) and the Society for Industrial and Organizational Psychology (SIOP).

When organizations hire, they have the option to hire internally or externally. Internal hiring refers to hiring an existing employee for a different position within the organization. External hiring refers to hiring a new candidate to fill a position in the organization. Essentially, they can be thought of as “build” vs. “buy” approaches. This blog will explore these two methods through a series of questions posed to our expert panel.

Note that responses have been edited for length and clarity.

In your professional opinion, what is the major benefit of internal hiring? And of external hiring?

Erin: Benefits to internal hiring for the organization are that you are able to hire someone into a role that is already a good culture fit, is aligned with your organizational values, and understands your internal practices. This reduces the organizational learning curve significantly, which may end up being more cost effective than an external hire.

Benefits for the internal hire are that they gain new skills and access to greater career opportunity, which improves their engagement. Additionally, when you are intentional about investing in your own staff, it shows the entire workforce that you are committed to career development, a major driver of job satisfaction and employee retention.

On the other hand, external hiring can be beneficial when you need to inject new ideas, experience, and skills into the organization.

Jeff: I am a strong proponent of internal hiring. It provides motivation for staff to support their career advancement, while retaining talent that the organization has developed. The internal hire can “hit the ground running” in terms of understanding the organization and how to get things done.

External hiring should really be reserved for skill expansion or for managing organizational growth.

Reeshad: The existing research suggests that internal hiring (referring typically to promotions rather than lateral moves) is often preferable to external hiring. Internal hires significantly outperform external hires during the first few years on the job. This is probably because, with apologies to John Donne, “no job is an island”: jobs are situated within organizations—and therefore, to be successful, an employee must possess not only job-specific knowledge and skills but also knowledge of the organization’s culture, policies, and procedures.

Research also suggests that internal hires are less likely to quit than external hires, presumably due to factors such as person-organization fit. Given how much it costs to replace an employee who quits, this represents another reason to hire internally. Additionally, internal hires cost a lot less in terms of salary. When companies promote from within, they can effectively bypass the external labor market.

On the other hand, the research does also find that external hires possess stronger formal credentials than internal hires. But if acquiring employees with these additional credentials comes at an added cost and translates into worse performance, the additional credentials arguably serve little purpose (other than possibly burnishing the organization’s external reputation).

The case for external hires certainly exists, but, thus far at least, it’s mostly conceptual with at best indirect empirical support. The argument goes something like this: (1) Over time, organizations grow ever more homogeneous (due, for instance, to attraction-selection-attrition¹ phenomena), to the point where they become calcified rather than agile—and therefore less able to either plan proactively for or respond in nimble fashion to future opportunities or threats. (2) This is unsurprising because the social and organizational psychology research literatures conclude that teams composed of members with very similar values, beliefs, and attitudes (let alone knowledge, skills, and abilities) perform more poorly than teams composed of members with higher psychological diversity. (3) Hiring externally increases psychological diversity and psychological diversity in turn permits organizations to be more agile. This is a plausible case but one that would benefit from more/better empirical evidence.

I’d add another potential benefit to hiring externally: it could increase demographic diversity. As an added bonus, the research suggests that demographic diversity is associated positively with psychological diversity—which brings us back to the previous argument in favor of hiring externally.

When you have been in positions to hire for a new role, did you tend to think of current employees who could fit this new role or of bringing in someone new?

Erin: I would say both. For our client consulting roles, we tend to promote a lot from within, but we’ve also recruited externally, especially when we haven’t had employees in our internal pipeline that were ready for the next step and/or when we were looking to bring different perspectives, backgrounds, and experience to the organization.

For internal roles, there have been times when we’ve recruited high performing client consultants into our Internal Operations Strategy Group to minimize the learning gap and bring known qualities into those teams. Other times, we’ve looked externally, especially when we needed different skill sets. Bringing people in from the outside can inject new ideas, new processes, and different ways of thinking, which is really important to an organization as it grows.

Jeff: Yes, they posted the positions online and sent out emails to the company internally. In smaller consulting firms, this is pretty easy, as you have knowledge of most of the staff and their capabilities. Once the position is filled with an internal resource, then you need to look at hiring someone to backfill that position, which could also open opportunities for other internal staff, or to hire from outside.

Reeshad: Yes, for classified staff Mason prefers to hire internally (i.e., from within the university) when possible—though it often isn’t. When I was Chair of the Psychology Department, we followed suit.

Does/did your HR department have existing processes for notifying current staff of the opportunities?

Erin: It’s usually a case by case decision. Sometimes we’ve circulated postings internally, or even sought out our own internal candidates to see if they are interested; sometimes we’ve posted internally and externally; and sometimes we’ve just posted externally. However, even if we have decided to post externally, we have always remained open to hearing from our own staff if they express interest in a position. If we ultimately decide to hire an external candidate, exploring the decision factors together with our employee can help mitigate negative impacts on engagement by making them part of the decision.

Jeff: Yes, they posted the positions online and sent out emails to the company internally.

Reeshad: Current Mason staff will often keep an eye out for other/better job openings at the university.

Are there any specific circumstances (e.g. poor organizational performance, creation of new department) in which you would say hiring internally or externally is the best option?

Erin: It really depends. Ultimately, leaders need to develop their vison for their future organizational structure based on their strategy, coupled with proactive succession management, and workforce planning processes. This will allow them to plan for their growth and weigh the pros and cons of a build vs. buy approach for various roles in the future.

Jeff: Definitely for building a new department, internal hiring is best to stand up the function, then potentially fill in with external hires. Any situation where you need leadership that understands how to operate efficiently in the organization should start with internal hires.

Reeshad: I’d suggest hiring externally if the organization needs or wants to increase demographic diversity.

Hiring externally—especially at the upper echelons—may also be worth considering if the organization: (a) is performing poorly in an absolute sense or relative to competitors; (b) has recently experienced ethical/legal scandals; (c) operates in a particularly turbulent industry, (d) operates in or anticipates a particularly turbulent external context attributable to economic, social, political, or environmental (e.g., climate change) shocks, or (e) has identified a need for considerably more innovation (e.g., new products or services).

Even in such cases, though, it’s possible that the putative benefits of external hiring could be achieved in other ways (e.g. hiring strategies, a diverse and empowered advisory board with term limits, culture change). We need more empirical research before we can conclude that external hiring is the best way, or indeed a good way at all, to increase organizational agility.

In circumstances other than the above ones, I personally would suggest hiring internally.

Do you think organizations should work toward increasing internal hiring? Why or why not?

Erin: I think organizations that are most effective have a balanced approach. Relying too much on internal hiring can mean that you limit your opportunity for diversity as you grow. On the other hand, relying too much on external hiring can also be more costly given the organizational learning curve, salary requirements, or impacts on internal employee engagement.

Jeff: Yes! For all the reasons above and the added benefit of efficiency/less of an “onboarding” need.

Reeshad: Yes, my reading of the research suggests that, in many and perhaps most cases, organizations should hire internally. Additionally, having a strong track record of upward internal mobility may help an organization motivate and retain high-performing current employees.

For organizations that wish to increase their internal hiring, what are some steps they can take?

Erin: Develop a Strategic Plan outlining your future direction, create your vision for your future organizational structure in alignment with your strategy and business model, and then institute intentional workforce planning and succession planning processes within your organization. Thinking ahead about your growth, planning for it, and then making conscious hiring choices will go a long way in developing a successful recruitment program.

Jeff: Make sure HR is onboard with the process and will post positions internally. Build career paths/ladders to help staff understand the requirements for promotion.

Reeshad: Based on the research on default values², I’d make two suggestions aimed at changing the default from external to internal hiring.

First, rather than putting the onus on employees themselves to be aware of and to consider applying for promotions, organizations could use algorithms to continuously match current employees with internal promotion opportunities and to automatically submit a first-stage application on their behalf.

Second, hiring authorities within organizations could be required to submit a written justification to HR for every external (but not internal) candidate they interview.

Do you have any closing thoughts or opinions on internal vs external hiring?

Erin: To me, it’s just a balance, and you want to consider both. Overall, it boils down to having a strong organizational strategy, coupled with good workforce planning and succession planning processes.

Jeff: Do your best to give opportunity to staff to grow!

Reeshad: Arguably, one way organizations can “have their cake and eat it” involves so-called “boomerang” employees—employees who are rehired after an intervening stint at another organization. In theory, boomerang employees give organizations the benefits of both internal promotions and external hires (though they also command salaries similar to external hires). But a recent paper³ in the Journal of Management suggests some grounds for caution. The paper offers reasonable suggestions, for instance that the reason boomerang employees left in the first place should be taken into consideration because boomerang employees tend to quit (again) at higher rates than either internal or external hires—and often for the same reasons that led them to quit the first time around.

And there you have it – there is no one-size-fits-all approach! Rather, there are many organizational and individual factors to consider before hiring. Some highlights include:

Culture & Organizational Fit: Internal hires presumably already understand and accept the organization’s cultural values. Additionally, hiring internally avoids some of the learning curve that comes with getting a new employee up to speed.

Diversity: Diversity is typically beneficial to an organization’s agility and, subsequently, performance. Hiring externally can increase an organization’s diversity.

Employee Engagement: An organization that tends to promote from within will garner greater engagement and loyalty from their employees.

Financial: External hires tend to command higher salaries than internal hires, though if they require less skills training, this cost could be offset.

Performance: External hires tend to have stronger formal credentials; however, as Dr. Reeshad Dalal points out, the extra credentials may mean little when considering that internal hires tend to outperform external hires in the first few years.

Hopefully these interviews have been illuminating. Happy hiring!

References:

1. Schneider B., Goldstein H. W., & Smith D. B. (1995). The ASA framework: An update. Personnel Psychology, 48(4),747–773.

2. Arnold, J. D., Van Iddekinge, C. H., Campion, M. C., Bauer, T. N., & Campion, M. A. (2020). Welcome back? Job performance and turnover of boomerang employees compared to internal and external hires. Journal of Management.

3. Behavioral economics (2019). Default (option/setting). https://www.behavioraleconomics.com/resources/mini-encyclopedia-of-be/default-optionsetting/