When faced with rapid growth – or a particular skills gap – businesses have two basic options: train-up existing employees or look for external talent. And for a long time, for most of the 20th century really, external talent was seen as the smarter choice. Companies needed to develop new skills as quickly as possible, and it was thought that targeted hiring was the most efficient way to improve your workforce.
Not only do new hires cost 18% more than internal promotions, they’re 61% more likely to get fired, and it takes them two years to reach the same performance standard.
It’s (almost) always better to hire from within
If we’re being frank, there’s also a subtle luster about recruitment: it’s arguably sexier to go after shiny, new talent than patiently upskill your staff. The funny thing is, over the last decade or so, study after study shows the opposite: pound for pound, dollar for dollar, it’s almost always better to hire from within, not without.
“Employers are sadly myopic about skills gaps,” says Nigel Dalton from global consultancy, Thoughtworks. “From data science to product management, security to user experience, they seem to assume that they’re the only organisation with that gap, so they can simply draw from a surplus of talented people in the market. In the end they spend a lot of money on recruiters.”
This isn’t exactly new thinking. In 2012, the Wall Street Journal ran a study from Matthew Bidwell, an assistant professor at the University of Pennsylvania’s Wharton Business School, that proved three things. Not only do new hires cost 18% more than internal promotions, they’re 61% more likely to get fired, and it takes them two years to reach the same performance standard. Subsequent studies have backed up these findings. New hires are (on average) more costly, less efficient, less productive, more risky and take longer to mature.
The "informal web" of interpersonal connections
The funny thing is, even armed with these statistics, Australian businesses continue to underestimate internal hiring. Faced with skills shortages in Data Science and Product Management (among others), companies are looking to the market for solutions.
Deloitte research found that, every year, Australian businesses spend $7 billion on recruiting new workers, but only $4 billion on developing their team’s skills. This is the case, even though the cost of replacing a bad hiring decision within six months is around 2.5 times the worker’s annual salary.
Dalton says it’s down to the way businesses miscalculate an employee’s inherent value. Staff aren’t just a walking bundle of hard skills, forged at university – as they progress in the business, they gain invaluable knowledge, connections and experience.
“There are multiple possible views of an organisation,” says Dalton. “The org chart shows one map, the budget another, cost centres a third. But the structure that gets things done is the informal web of interpersonal connections that employees build over time. An internal hire takes that network with them wherever they go, actually strengthening your overall business as a result.”
"Staff aren’t just a walking bundle of hard skills, forged at university – as they progress in the business, they gain invaluable knowledge, connections and experience"
There are no sacred cows anymore
We’re starting to see this trend across various industries. An HR professional jumps into Business Analytics and brings across valuable management skills. A Digital Marketer gets a qualification in UX or Data Analysis, and suddenly the online strategy begins to shift.
Dalton calls this “mapping career paths for your people”. He points to the example of REA (and their Employee Assistance Program), which had Lawyers become Product Managers, Engineers become Designers, and HR people become Business Analysts. Thoughtworks operates on the same basic principle. There are no ‘Sacred Cows’ anymore. Career progression should be something fluid, broad, agile and creative.
“Transparency around roles, vacancies and formal policies for development (like a fixed sum to spend on yourself annually) are supplemented by an open culture of encouraging people to try new things, in new places,” Dalton says. “Knowledge sharing is expected, and promotions come with achievements reached.”
"Almost all the businesses surveyed (around 95%) said that they, as an employer, received benefit from staff training"
The good news?
The good news is, some businesses are beginning to cotton-on. Research from RMIT Online found that many employers are now investing less money in recruitment and more money in staff training. Around 45% of Australian business leaders are delivering comprehensive internal training, and 44% are using external providers (like Udacity and RMIT Online). This trend has picked up momentum over the last couple of years. According to the ABS, more than 37% of adults between 25-64 participated in work-related learning in 2017.
Even better, survey results indicate the process is working. Almost all the businesses surveyed (around 95%) said that they, as an employer, received some benefit from staff training. And two thirds of respondents said the benefits were split equally between the employee and the company itself. The exact amount of this ‘benefit’ is hard to measure, but studies have shown that, for each hour of informal learning, businesses get a productivity increase of around 1%.
There’s also the benefit that often gets overlooked: reputation. As staff training and internal hiring become more common, businesses who don’t offer these opportunities will get left behind.
“As an employer, if you haven’t done the miles, developing your reputation on SEEK, in Meetups, on LinkedIn, or in general search terms with Google, it’s about to cost you a lot of money to hire a good person,” says Dalton. “Try typing your company name and ‘employee rating’ into Google, and see how others view you.”