At companies large and small, the hunt for top talent never ends. Lately, amid efforts to cut costs and increase the odds of employees being successful in their positions, many businesses are finding talent in a place that may have been overlooked in the past — within the company itself.
In the past, external hiring was in many ways the preferred norm. Rather than hire from within, companies seemed to prefer the idea of stealing talent away from the competition, thereby bringing in new perspectives and bit of intelligence, among other benefits. Major companies had sizable advertising and recruiting budgets, and assumed that a larger applicant pool would result in better hires. Flush with cash, they could take chances on hiring passive or active job seekers. Spending tens of thousands of dollars on recruiters seemed necessary to hire top talent, especially in executive-level positions.
Nowadays, however, the weak economy is forcing recruiting budgets to be slashed, and companies are doing more with fewer resources. Instead of the default approach of hiring from the outside, companies are discovering (or rediscovering) that internal recruiting is cost-effective and sensible in more ways than one.
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The average cost of finding and hiring someone from outside the company is 1.7 times more than an internal hire ($8,676 vs. $15,008), reports the Saratoga Institute. What’s more, research shows that between 40% and 60% of external hires aren’t successful, compared to only 25% for internal hires. This is good news for employees who typically leave firms due to lack of career opportunities, yet it’s bad news for job seekers who may have fewer jobs to apply for as internal hiring rises.
Among major employers who have demonstrated increased interest in hiring from within, often via leadership development programs, Booz Allen Hamilton’s internal recruiting system called “Inside First” filled 30% of open positions with new hires in 2011, up 10% from 2010. In 2012, the firm has already placed 5,500 internal staff as well. Hill+Knowlton Strategies, a global PR firm, hired 28% internally and 19% externally for their top 97 jobs in 2011. Enterprise Holdings made approximately 10,000 internal hires in their fiscal year ending in July 2012, up from 8,700 in 2011. Novelis, the world’s largest manufacturer of rolled aluminum products with 11,600 employees in 11 countries, has placed 41% of new hires through internal hiring. Finally, Energy Future Holdings has increased its internal hiring from 56% in 2010 to 61% in 2011, and expects an internal hire rate of 69% this year.
Here are four reasons why companies are concentrating on internal hiring now:
It’s Cheaper. Companies who hire internally save money on recruiting fees, training, the opportunity cost of not having the position filled, advertising (on job boards), referral bonuses (at some companies), travel and relocation costs. Novelis has already saved roughly $2 million over the past two fiscal years due to their internal recruiting efforts.
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It’s Quicker. The entire process from reviewing a job description to advertising to potentially paying a recruiter to interviewing several candidates to completing an actual hire easily takes months for external hires. For an internal hire, the process can be over and done with in a few weeks. Internal hires are already in HR databases. They usually have the backing of managers, and their performance reviews are already accounted for. Managers should have a good sense of the strength of the candidate within the corporate environment. External hires, on the other hand, can be a risk because of the many unknowns. If nothing else, it’s difficult to tell how well (or how poorly) they’ll fit into the corporate culture.
It Works Out Better. It’s easier for employees to succeed at a new job in the same company because they already have connections and knowledge about how work gets done. A study conducted by the University of Pennsylvania’s Wharton School found that while external hires were paid 18% more than internal hires, the outsiders brought in had worse performance reviews during their first two years on the job. “We have found that internal candidates get to peak performance faster than do externals,” said Leslie Joyce, Chief People Officer at Novelis. “They need less infrastructure and support to be successful.”
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It’s Good for Employee Morale. Employees are frustrated when a new role is taken by someone from the outside. If they feel as if they can’t move up in their own company, they are far more likely to move on. “Promoting internally encourages employees and shows them that they have a future at the company, therefore serving as a retention tool,” says Allison Cohen, Director of External Communications at Hill+Knowlton Strategies. Cisco found that its internal career program called “Talent Connection” has increased their employee’s career satisfaction by 20%.