From the August 1998 issue of Entrepreneur

Growth in revenue usually brings with it a critical need for additional employees. As new positions are created, the question to think about is this: Should you fill senior-level jobs from within? Or should you hire outside talent?

Katherine Hammer, CEO and co-founder of Austin, Texas-based Evolutionary Technologies International Inc. (ETI), faced that decision as her high-tech business kept recording nonstop growth. Before the growth spurt, the company had been leanly staffed. "It's a mistake to hire too much high-powered talent too early," says Hammer. "They're expensive, and the fact is, when you're small, you don't have full-time jobs for them yet. They sit around twiddling their thumbs."

But as ETI--which provides sophisticated data management tools to clients in banking, health-care, insurance and other industries--grew, so did its need for top-level executives. So Hammer promoted a number of people from within the company to fill jobs that carried substantial responsibility.

A wise move? Not according to Hammer. In the past year, she has replaced three executives with outsiders, mainly because, she says, "As we grew, we hit a level of complexity where the people who had been our managers could no longer do the job. They could not scale up with our growth. The three senior managers I have on board now joined us knowing how to take us to the next level. Every morning when I come in and see them, I breathe a sigh of relief. They're doing an infinitely better job than their predecessors."

Hammer now regrets her delay. "If I had made the decision to bring in outsiders sooner, our company's bottom line would be better off," she says. "Delay, and you'll pay for it."


Robert McGarvey writes on business, psychology and management topics for several national publications. To reach him online with your questions or comments, e-mailrjmcgarvey@aol.com

In Or Out?

Is the verdict emphatically in favor of looking outside for high-powered talent? Aside from a possible lack of promotable people inside, there are plenty of arguments in favor of hunting outside for new hires. "If you never go outside, you risk becoming inbred," says David Opton, executive director of Exec-U-Net, a Norwalk, Connecticut-based national networking organization for executives and professionals earning more than $75,000 per year. "When you [hire from] outside, you'll get senior managers with fresh ideas and new perspectives."

Another plus: Outsiders don't arrive with any internal political baggage, such as favors owed to other employees. "Somebody from outside can come in and do things insiders wouldn't have the heart to do or that they might feel couldn't be done politically," says Opton. "People from outside have more freedom to act."

But experts agree your focus shouldn't be exclusively on outsiders as senior-level openings emerge. In fact, any survey of the nation's hiring experts would find more of them favoring the internal side of the argument. Says Jeffrey Pfeffer, a business professor at Stanford University in Stanford, California, "Hiring from outside has become a first resort for many businesses, but it should be the last resort." For companies that lack the talent internally, hiring from outside is obviously the only option--as ETI's Hammer can testify. But that's the exception. "It's almost always better to promote from within," says Pfeffer.

Just what is wrong with ignoring your existing pool of workers? The list of reasons swiftly grows:

  • "When you hire from outside, it disheartens the people who are inside," says Pfeffer. "They joined the company thinking they would grow with it, but when the company grows and they are bypassed, it's demotivating." Worse still, the very people most likely to feel keenly demotivated are the ones who have been your strongest contributors--and the ones you want to keep fired up because, in many ways, it's their hard work that has helped create the new job openings. Skip over them when promotions are at stake, and you run the risk they'll jump ship. "Good people will say `Why should I stay in a firm that won't give me promotions?' " says Terri Griffith, an assistant professor of organizational behavior and technology management at the Olin School of Business at Washington University in St. Louis.
  • "Hire from outside, and these new people have to learn the ropes and figure out how to get things done," says Pfeffer. When you bring in an outsider, there's always a learning period--weeks, sometimes months--during which the newcomer is finding out the way things happen in your business.
  • A new hire's team may sabotage his or her effectiveness, warns Aimee Kaye, president of Actuarial Careers Inc., a White Plains, New York, executive recruitment firm. You may be looking to hire a terrific leader, but if the workers dig in their heels and refuse to follow, what happens to the leader? "If you don't have the support of the people below you, they will ultimately destroy you," says Opton.
  • Hire outside, and you don't know what you'll get until you get it, warns Pfeffer. "With people internally, you should know their strengths and weaknesses very well," he says. "With people outside, mistakes get made." It's a scary thought, but in today's litigious society, many companies are tight-lipped about their employees and former employees. Serious problems--from alcoholism to mental instability--go unmentioned during calls for references. Bad hires can cause chaos in small businesses, which can be terribly expensive to correct. Less dramatic, but potentially very costly, is the risk that the outside talent turns out not to be quite as wonderful as you thought they'd be, says Pfeffer. "People from outside always look a little better," he adds--that is, until they're hired, and suddenly the faults and failings you overlooked are in the spotlight.

An Inside Look

So what do you do when you need high-powered talent but none of your existing employees can fill the bill? The first remedy, says Pfeffer, is to look at your staff again. "Companies often have much more internal talent than they think they do," he says. Look hard, and you might just find the job candidate you need.

What if you still can't find a good candidate? The best advice on this score comes from Griffith, who counsels small businesses to plan ahead for future personnel needs. Since you know you're growing, you also know the kind of help you'll need down the road, so start grooming today's staff to fill tomorrow's jobs, says Griffith. "Plenty of training is available at affordable costs," she says. From community colleges and university extension programs to seminars sponsored by professional societies such as the American Management Association, there is an abundance of training available for employers seeking to invest in their employees and the growth of their companies. "If you can anticipate a staffing need that will arise in three to six months, for example, you can take steps to prepare an employee to fill that role," says Griffith.

The benefits of preparing an insider are immense: "You're hiring a senior-level employee who comes into the job with basic knowledge about your company, your industry and your competitors," says Griffith. "He or she starts the job ready to contribute."

Another advantage is the resulting motivation of your staff. "Doing this serves as a big motivator to all the people in your organization," says Griffith. "Your employees will see your business as one that helps its people do good things for themselves." And that's exactly the kind of company the very best performers want to work for. So do this once, and chances are, you'll be doing it often because you'll have a work force that's fired up and continually striving to make your company more successful. As well they should--because they know that as the company succeeds, so will they.

Next Step

Read Jeffrey Pfeffer's The Human Equation: Building Profits by Putting People First (Harvard Business School Press). It presents a cogent argument, with lots of examples, in favor of building a great company by rewarding your people. Chapter 5 ("Ten Reasons Why Smart Organizations Sometimes Do Dumb Things") specifically looks at the argument for promoting from within.

Contact Sources

Actuarial Careers Inc., (914) 285-5100, aimeekay@actuarialcareers.com

Evolutionary Technologies International Inc., (512) 327-6994, http://www.eti.com

Exec-U-Net, (203) 851-5180, http://www.execunet.com