As health care and related costs rise and business leaders look to lean down their costs to a fatter bottom line, part of the equation is an organization’s plan for new hires and developing talent. When filling key positions and building depth in key functional areas, an organization has two options: develop and promote internally, or draw talent externally.

The following blog will cover some key statistics for following hiring best practices.

Time Magazine recently released an article weighing the pros and cons of internal vs. external promotions for hiring best practices. Citing research from the Saratoga Institute, Time reported the average cost of hiring new employees from outside of the company being 1.7 times higher than that of hiring internally ($15,008 vs. $8,676).

To boot, Wharton School of Business Professor, Matthew Bidwell, in his research paper covering The Effects of External Hiring Versus Internal Mobility reports that external hires have a higher voluntary exit rate than internal hires, and are generally paid 18% more than internal hires. They typically have poorer performance evaluations in the first 2 years as well. Based on the supporting research, here are a few things to consider when deciding whether or not to hire externally or promote internally for your next job opening.

The Pros of Hiring Externally

External Hires Promote Faster: The typical external hire, though slow to the start in the first few years, actually promotes faster than internal hires over time. That means a greater long-term ROI than in the short-term.

New Fresh Insights: This is a double-edge sword. For energetic and young external hires, be prepared to experience the pros and cons of fresh new insights. Keep an open mind and don’t be afraid to move from the “rut” of how you currently do business.

Tighter Technical Knowledge Gap: In technical fields, there tends to be a faster ramp-up time to getting results, as there is less training involved in getting the new employee producing results. This is more so the case with individual contributors than managerial positions, where adopting the new company culture and growing trust and relationships is more integral to job performance.

The Cons of Hiring Externally

Lost Production During Recruiting: Companies that are keeping tabs on employee training and have deliberate succession plans are able to fill positions faster than those reactive to sudden gaps in the organization. Externally hiring means having to pull resources to fulfill responsibilities in the short-term, which has a further ripple effect across operations.

Higher Turnover and Voluntary Exit: As the data above shows, external hires cost almost twice as much to recruit, and are more likely to leave in the first two years in the position. The average Millennial is considering a job change only six months after being hired. This means putting in place a deliberate plan to keep new external hires engaged in order to curb your voluntary exit rate.

Related Blog: Three Effective Employee Performance Review Best Practices

Possible Resentment Amongst Current Employees: Without a doubt, hiring internally has a positive impact on company morale, and motivates employees with a clear promotion path. Employees know who their peer-performers are, and in general, respond positively to new leadership from within than from outside the organization. This can be a great tool when looking to increase employee engagement.

What it Means to HR Professionals

In conclusion, there is a lot of incentive for following succession planning best practices and building your hiring pipeline around developing internal talent. Doing so demands a lot of foresight, but finding the time as an HR professional to construct a deliberate succession plan within your organization could be a valuable HR initiative with a strategic impact on the company and the bottom line.

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