When It Comes to Talent :

This piece was co-authored with David Knechtel: the managing director at Client Counsel.

This piece is also part of the Essential Readings for the Keynote offering, "The Leader we Needed Was Us."

The next five years will be a critical time for talent management because by 2030 even the youngest Baby Boomers will turn 65. But there’s a persistent challenge to making the most of your people’s potential: when it’s time for change, we too often reach outside the organization, dreaming of that superstar who is just waiting to arrive – if only we can find them.

When external talent is brought in, they usually command about 18 per cent higher compensation than an internal candidate, according to a report in Administrative Science Quarterly. That pay increase wouldn’t be so bad, except that they perform worse than internal promotions over the first 24 months. Bad goes to worse when you consider that external hires are 20 per cent more likely to leave the organization – during their first year alone, according to an article from Deloitte Insights.

Perhaps you’ve seen this inside your own organization. We have. David was working with a team who needed a leader for a national team. The previous hire had been brought in from the outside, through a previous collaboration with an executive.

Her start on the job hadn’t been a resounding thunderclap of success. Early stumbles were chalked up to “settling in,” early wins were all celebrated as evidence of her stardom (and of the even more impactful outcomes expected down the road).

But those eye-popping results never materialized. After some months, things still weren’t working out, and by this time the honeymoon period was over. Both sides realized that a change was needed. Nevertheless, the leadership team still believed (in the face of this recent negative experience) that the external route was the way to go when replacing their previous “superstar.”

They weren’t moved by the reality that 75 per cent of internal hires succeed in their new roles or that among internal hires nearly half stay a further 3 years with the company, according to HRForecast. Rather, internal candidates were discounted as “just not ready” or “not strategic enough.” The reality though is that, unsexy as it is, we’re usually better off with the candidate we know well – warts and all – even if they lack any of the outsider’s mystique.

After many discussions among the team David was working with, senior leadership finally agreed to “take the chance” on an internal candidate. For the team, it was a huge win to see a trusted manager advance and there were a number of unexpected benefits: faster decision-making, better understanding of the evolving marketplace and a wider number of existing relationships that could be leveraged. And the team achieved their best performance ever as a result.

These dimensions start to tell the story behind the numbers. Internal candidates bring a depth of organizational know-how and relationships with them to their new roles, starting from Day 1. This helps them to be more effective in the early going. 

Relationships also keep people in jobs, which can help to explain why internal hires stay longer. They understand their colleagues and can be more effective by driving greater performance of those around them.

Finally, when a close-knit team sees the leadership team valuing their work and trusting them to deliver more, they’re encouraged to rise to the challenge. They see that there really are opportunities worth seizing, improving employee loyalty. This will be especially important in the coming years, as nine in 10 Millennials prioritize career growth potential as an essential consideration when deciding to take a job, according to Robert Walters. With the turnover to come, organizations that demonstrate that advancement opportunities are real will have an advantage in the competition for talent.

So how do we decide when an internal or external hire might be a better choice? Here are some practical tips to consider, given your situation:

• Look outside when: you’re seeking fresh perspectives (to change things up and decalcify the groupthink), or when you’re staffing a role that’s quite unique relative to other roles inside your organization (and therefore the skillsets you have internally are unlikely to overlap with the needs for this role).
• Look inside when: you’re looking to strengthen leadership in an area that’s already core to your organization (because the skillsets for this role are already in your ecosystem), and when you’re looking to improve an outcome that depends deeply on teamwork and contextual knowledge (because your existing team members will leverage their existing expertise and both draw from and contribute to their existing networks).

It’s very du jour these days to encourage team members to take a growth mindset. What we’re advocating here is that – if we want our team members to succeed and our organizations along with them – it’s not enough for employees to take a growth mindset about themselves. We as leaders need to have a growth mindset about them as well.