Leaders - Promote From Within Or Ready Made?

by David Brookmire

The question: "Should we hire from the outside or promote from within the company," sparks a lot of debate, as there are definite pros and cons to both approaches. As CEO, this is a very important question that directly impacts your succession planning practices, and something you'll need to discuss with your Board of Directors.

In a perfect world, it is preferable to promote from within, with an orderly and planned transition.  This approach has the least impact on shareholders, employees, etc.  Internal candidates already understand the company culture, have inherent knowledge about the organisation and its systems, and don't require costly recruiting, relocating and training expenses, as external hires often do.  Promoting from within boosts company morale and clearly demonstrates that hard work and loyalty are rewarded within the organisation.  Unfortunately, with the poor state of succession planning in many companies these days, it's unlikely that internal candidates will be ready when needed.

External CEO hires often cost more, perform lower, and are more likely to be terminated than internal hires. There is also ample evidence that CEO and leader performance is largely situational.  So, even if CEOs have been previously successful, when they transition elsewhere, they may fail. It can also be detrimental to a company's morale, especially if internal candidates thought they'd be promoted and take over a particular role. Clearly, the risks increase with external hires.

But, sometimes, hiring externally is the best decision.  By bringing in external talent, companies have the benefit of new perspectives and fresh new ideas.  An external hire can also add depth to a company's bench, with new skill sets, helpful knowledge and valuable connections/networking opportunities.  In the case where the company's culture has become toxic, it can be important to bring in new talent to help 'right the ship'.  A new leader is unencumbered by the past, and won't get bogged down in the 'but this is how we've always done it' mentality. 

There are clear advantages and disadvantages of hiring a leader from the outside:

Advantages	Disadvantages
New skills and experiences imported into company	Costs more to hire from outside
Improves the promotability of the internal talent pool	Impacts internal morale and may lose senior leaders
Easier to make changes since leader is unencumbered by the past	Ramp-up time to add value takes longer
Potential for innovation higher	Higher chances of being terminated

On the other hand, when you promote from within you have the following effects:

Advantages	Disadvantages
Less ramp up time to perform	New skills and experiences limited
Morale higher among top team with someone they know - so they're less likely to leave	May have limited upside for promotion
Better chances of being successful	Takes longer to make necessary changes since ingrained in the company culture
Costs less	Less likely to bring in new thinking and ideas

When to hire from outside?

The answer to the question of hiring from outside or promoting from within depends upon a number of factors. Consider these issues:

• Is the company in some financial turmoil and/or attempting a turnaround?
  
  In these cases, it can be tremendously helpful to have an outsider that can lead with a fresh perspective and be willing to make changes that an internal senior leadership team may be reluctant to do. Often, the skills to effectively lead a turnaround are very different than leading a growing or mature business, and bringing in talent from the outside can be a major benefit.
• Can the organisation handle the potential turnover from an external hire?
  
  In many cases, a new leader will bring their team with them to the new role. Over time, the top team may be replaced with the external hire's 'people', depending on the circumstances and the competencies that already exist within the company. If there's friction between the new leader and the existing leadership team, it often produces turnover amongst the senior team, as well.
• Is the current culture toxic or simply ineffective in reaching a new direction?
  
  Outsiders are often more successful at changing the culture vs. promoting from within and experiencing 'more of the same'.
• Is the leadership team adrift and in conflict?
  
  In this case, either an insider or outsider could make a difference. However, the insider would need to have the courage and leadership to make changes to the very culture that may have worked well for the team - and the company - in the past.
• Are there clear competency deficiencies in the team?
  
  The key is to determine what competencies will be required in the next 3-5 years and compare the internal candidates against these criteria. If there are some critical gaps within the internal candidates, the organisation may need to hire externally to quickly infuse new skills.
• Do you have potentially capable leaders in-house?
  
  If not, the choice is clear - you must hire from the outside. And start prioritising succession planning more, to prevent this problem from continuing in the future. Identify and groom top talent, preparing them to take on bigger roles as they learn, grow and evolve.
• Will the leader be promotable or a blocker?
  
  It's one thing to have an internal candidate who can do the job at hand. The organisation should determine if the leader has upside potential and if not, would they block the position for the development of other leaders, since it would not become vacant.

Setting your organisation up for success

As CEO, here are some actions to help you set up your organisation for success:

• Ensure that you have a strategic plan in place that's continually updated
  
  The plan should point out the competencies for each leadership role and outline what competencies would be required for the organisation in the future. This ensures that future selection decisions take these requirements into account during the selection process.
• Have an active succession planning process in place for each leadership position and the next level down
  
  Engage in healthy dialogue with your Board of Directors or Advisors to have them fully invested in the process. Be open to outside perspectives on your internal candidates, as the Board members may be able to offer some insights that would impact your evaluations of the internal candidates. Arrange opportunities for the senior leaders to interact with the Board members in Board meetings or through committee meetings that are part of Board member responsibilities. If you do not have a successor in place, determine when and how you will hire your replacement and groom them for the role.
• Ensure that the HR department has a robust and updated human resource plan that projects the number of openings over a future time period (usually 3-5 years)
  
  This presents a clear picture of where the company needs to focus its efforts - both in developing internal talent and hiring from the outside. Establish a general mix of internal and external hires for the firm. For example, for middle management roles, you may need to establish a 50/50 internal promotion/external hire mix to meet your forecasted need. That way, it's clear to all the leaders what your expectations are for their talent management responsibilities. The mix may change by level, with higher percentages of external hires at the lower and entry levels.
• Spend a minimum of 1-2 days per month in talent management activities
  
  Specifically, have talent review sessions with your top team, arrange to meet and work with high potentials, get involved in recruiting new talent into the company and, if your firm offers management training, help deliver some of that content. The CEO's actions demonstrate to the rest of the organisation what's important. If you don't spend time in talent management activities, then you're not likely to have a robust pipeline of internal talent to take over your leadership roles.
• Bring in an outside consultant
  
  It can be beneficial to bring in an outside leadership advisor to assess the situation, review and react to your company's succession plans, recommend training and development activities for your staff, and help identify potentially-promotable employees, as well as 'talent gaps' that exist within your organisation. An external advisor brings objectivity, experience, knowledge about what has worked well elsewhere, a fresh perspective and innovative solutions.

Like with so many other important business decisions, there are positives and negatives with both possibilities - promoting internally or bringing in external talent.  Deciding whether to promote an internal candidate - or hire an outsider - depends on  a combination of circumstances.  Carefully consider these circumstances, your internal competencies and the pros and cons of each solution.  Also, continuously plan for projected openings so that you have a range of viable options available to fill openings.  With the right team in place, you will maximise success.

Source: http://www.iidmglobal.com