The Payroll Blog

News, tips, and advice for small business owners

Internal Hiring vs. External: The Debate Shifts

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The trend is undeniable. In these tight economic times, companies looking to stabilize costs are finding new hires from within their four walls instead of from the outside.

It may have always been the best policy to favor internal hires, but a few years ago when the economy was better, it was trendier to favor outside hiring. In essence, outside hiring is more of a roll of the dice, with higher upsides and downsides than known quantity internal selection. Time Magazine's business section crunches the numbers:

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.

Of course, hiring from the outside often is the best option. Human resource experts, however, caution that because going outside can be a morale killer within the company, clear policies should be in place that spell out hiring policies and the selection process.

Employees naturally assume that internal candidates have the edge over external candidates but some companies make it clear that policy dictates that no such preference exists. Setting a clear and honest policy can prevent internal dissension.

But, back to the trend of internal hiring. During the economic slowdown, companies have focused on lowering costs and financial risks.

According to Time, there are four reasons companies are now hiring internally more these days:

  • It's cheaper. No more recruiting budgets and referral bonuses.
  • It's quicker. The interviewing process is faster, the training more streamlined and expectations are more in line with results.
  • It's more effective. On average, the internal hires perform better and there are fewer absolute busts, which cost a company money and forward momentum.
  • It's better for employee morale. Building a "farm system" from within can make your organization strong for years to come and incentivize strong performance like few other strategies.

When building a stronger house, companies are realizing that finding support from within often is the best policy.