Many executives often wonder if it is worth the effort to develop leaders internally, or if it is cheaper to hire from the outside. After a decade of experience pondering this question I have come to the conclusion that it depends. Who you hire, and the best person for the job, ultimately depends on what you are trying to achieve. For example, if you want to break into a new market and an external candidate has the business development roster you need, and the motivation to use their contacts for the benefit of your business, it will likely be advantageous to hire them over promoting someone internally who does not offer the same benefits. However, the fundamental problem lies in the reality that external hires are typically more expensive in the short term, and they often work out only about 50% of the time, at least for the long term. So, if you have someone internally who shows that they can learn quick, they understand the business, and they want to stay with your company, it can often be beneficial to give them a chance.
The key is that when you do give them a chance, don’t just drop them into the new role with a quick, “good luck, now good bye!” Instead really think about what their gaps are, and how you are going to support them. I encourage clients to use a 360 lens when thinking about how to best support new leaders. That is, what support do they need from their boss, their peers, and the team that directly reports into them? And, of course, I am a fan of using external coaches to support new leaders. Coaches can help them to uncover blind spots, accelerate their thinking, and hold them accountable in ways internal partners cannot.
Here`s a quick calculation that I often use to show that buying leadership talent externally often comes with a premium price tag compared to building talent internally. This table was adapted from research from the Corporate Executive Boards Recruitment Roundtable. It could be argued that these numbers are on the low side because they don`t take into account the 10:6:2 rule of employee engagement which essentially says that a 10% improvement in commitment can increase an employee`s effort by 6%, and every 6% increase in commitment can increase an employee`s productivity by 2 percentile points. Given that an executive has a large span of control they have a multiplier effect in terms of how they can impact productivity, or destroy it. Although research backs this concept up, I did not include the productivity impact of this multiplier effect in the table below to keep it super simple, but mark my words, the numbers for hiring externally could be even double what you see below.
You can take this table and calculate what you spend on leadership development, or what you believe you SHOULD spend to adequately develop people internally. In most cases you will come up further ahead by developing your pipeline internally, as long as you are strategic about who you promote, how you support them when promoted, and you take a long term view on their development.
|External hire costs||Low||High|
|Executive Search Costs(20-40% of annual comp)||$30,000||$100,000|
|Candidate offer signing bonus or relocation costs||$10,000||$75,000|
|Time to productivity(6 to 12 months)||$125,000||$250,000|
|Recruiter Costs (sourcing, internal interviews, candidate evaluations etc).||$3,000||$10,000|