Inner Strength? Promoting from within isn't always your best bet.

Growth in revenue usually brings with it a critical need foradditional employees. As new positions are created, the question tothink 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-basedEvolutionary Technologies International Inc. (ETI), faced thatdecision 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 tooearly," says Hammer. "They're expensive, and the factis, when you're small, you don't have full-time jobs forthem yet. They sit around twiddling their thumbs."

But as ETI--which provides sophisticated data management toolsto clients in banking, health-care, insurance and otherindustries--grew, so did its need for top-level executives. SoHammer promoted a number of people from within the company to filljobs that carried substantial responsibility.

A wise move? Not according to Hammer. In the past year, she hasreplaced three executives with outsiders, mainly because, she says,"As we grew, we hit a level of complexity where the people whohad been our managers could no longer do the job. They could notscale up with our growth. The three senior managers I have on boardnow joined us knowing how to take us to the next level. Everymorning when I come in and see them, I breathe a sigh of relief.They're doing an infinitely better job than theirpredecessors."

Hammer now regrets her delay. "If I had made the decisionto bring in outsiders sooner, our company's bottom line wouldbe better off," she says. "Delay, and you'll pay forit."

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

In Or Out?

Is the verdict emphatically in favor of looking outside forhigh-powered talent? Aside from a possible lack of promotablepeople inside, there are plenty of arguments in favor of huntingoutside for new hires. "If you never go outside, you riskbecoming inbred," says David Opton, executive director ofExec-U-Net, a Norwalk, Connecticut-based national networkingorganization for executives and professionals earning more than$75,000 per year. "When you [hire from] outside, you'llget senior managers with fresh ideas and newperspectives."

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

But experts agree your focus shouldn't be exclusively onoutsiders as senior-level openings emerge. In fact, any survey ofthe nation's hiring experts would find more of them favoringthe internal side of the argument. Says Jeffrey Pfeffer, a businessprofessor at Stanford University in Stanford, California,"Hiring from outside has become a first resort for manybusinesses, but it should be the last resort." For companiesthat lack the talent internally, hiring from outside is obviouslythe only option--as ETI's Hammer can testify. But that'sthe exception. "It's almost always better to promote fromwithin," 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 whoare inside," says Pfeffer. "They joined the companythinking they would grow with it, but when the company grows andthey are bypassed, it's demotivating." Worse still, thevery people most likely to feel keenly demotivated are the ones whohave been your strongest contributors--and the ones you want tokeep fired up because, in many ways, it's their hard work thathas helped create the new job openings. Skip over them whenpromotions are at stake, and you run the risk they'll jumpship. "Good people will say `Why should I stay in a firm thatwon't give me promotions?' " says Terri Griffith,an assistant professor of organizational behavior and technologymanagement at the Olin School of Business at Washington Universityin St. Louis.

• "Hire from outside, and these new people have to learn theropes and figure out how to get things done," says Pfeffer.When you bring in an outsider, there's always a learningperiod--weeks, sometimes months--during which the newcomer isfinding 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 WhitePlains, New York, executive recruitment firm. You may be looking tohire a terrific leader, but if the workers dig in their heels andrefuse to follow, what happens to the leader? "If youdon't have the support of the people below you, they willultimately destroy you," says Opton.

• Hire outside, and you don't know what you'll get untilyou get it, warns Pfeffer. "With people internally, you shouldknow their strengths and weaknesses very well," he says."With people outside, mistakes get made." It's ascary thought, but in today's litigious society, many companiesare tight-lipped about their employees and former employees.Serious problems--from alcoholism to mental instability--gounmentioned during calls for references. Bad hires can cause chaosin small businesses, which can be terribly expensive to correct.Less dramatic, but potentially very costly, is the risk that theoutside talent turns out not to be quite as wonderful as youthought they'd be, says Pfeffer. "People from outsidealways look a little better," he adds--that is, untilthey're hired, and suddenly the faults and failings youoverlooked are in the spotlight.

An Inside Look

So what do you do when you need high-powered talent but none ofyour existing employees can fill the bill? The first remedy, saysPfeffer, is to look at your staff again. "Companies often havemuch 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 bestadvice on this score comes from Griffith, who counsels smallbusinesses to plan ahead for future personnel needs. Since you knowyou're growing, you also know the kind of help you'll needdown the road, so start grooming today's staff to filltomorrow's jobs, says Griffith. "Plenty of training isavailable at affordable costs," she says. From communitycolleges and university extension programs to seminars sponsored byprofessional societies such as the American Management Association,there is an abundance of training available for employers seekingto invest in their employees and the growth of their companies."If you can anticipate a staffing need that will arise inthree to six months, for example, you can take steps to prepare anemployee to fill that role," says Griffith.

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

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

Next Step

Read Jeffrey Pfeffer's The Human Equation: BuildingProfits by Putting People First (Harvard Business SchoolPress). It presents a cogent argument, with lots of examples, infavor of building a great company by rewarding your people. Chapter5 ("Ten Reasons Why Smart Organizations Sometimes Do DumbThings") specifically looks at the argument for promoting fromwithin.

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