Why "new hires" aren’t the answer

You’ve probably heard the adage that, all things being equal, it’s better to promote internally than hire externally. Over the years, this has become one of the most enduring industry mantras, but not many people know where it started, or why it turns out to be true. 

In 2012, the Wall Street Journal picked up a study from Matthew Bidwell, an assistant professor at the University of Pennsylvania’s Wharton Business School. Bidwell suspected that employers were losing money by hiring external talent, instead of training and promoting their employees. He looked at seven years of data from financial services firms, investment banks and publishing companies and made some pretty shocking discoveries (well, shocking for 2012). Not only did the new hires make 18% more money than internal promotions, they were 61% more likely to get fired, and it took them two years to get up to the same performance standard.  

Bidwell’s results have been backed up in subsequent studies, and yet, according to recent research from RMIT Online, 49% of professional businesses in Australia are still actively hunting for external talent.    

The cost of hiring 

Deloitte research has found that every year, Australian businesses spend $7 billion on recruiting new workers, and only $4 billion on training and 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.   

There are hidden costs too. In the years following 2012, Bidwell dug a little deeper into the numbers. He discovered, in many cases, because a team had to bring the new hire ‘up to speed’, the performance of the entire business unit was adversely affected (the silver lining was that hiring external talent did tend to raise the average wage for employees). His work references other experts, like Harvard Business School professor Boris Groysberg, who examined the careers of a thousand top investment analysts after they changed firms: Groysberg found that, on average, performance took significant and lasting dip. Job-hopping might be great for employees, and a necessary part of the modern economy, but on average, it’s not good for business.    

A different way 

The reason employers turn to external talent is obvious: they have acute skills shortages – particularly when it comes to digital fluency, leadership and data analysis – and they’re looking to plug them as quickly as possible. You can probably also point to the subtle, inherent luster of recruitment: it’s arguably more sexy and exciting to hire someone new than patiently develop existing employees.  

But RMIT Online’s research indicates that many employers are now investing less money in recruitment and more money in staff training – with surprising benefits for all involved. 

By looking at more than 600 businesses in professional industries, it was found that 45% of leaders are delivering comprehensive internal skills training, and 44% are using external providers (like Udacity and RMIT Online). This is a growing and significant trend. According to the ABS, more than 37% of adults between 25-64 participated in work-related learning in 2017.  

Training gets results  

The big question, of course, is: does training work? Is it worth a company’s hard earned money to upskill existing employees? Not just for the employee’s benefit (which seems obvious and valuable), but for the business itself? 

So far, research indicates a resounding ‘Yes’. 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. It’s hard to put a dollar figure on this ‘benefit’, but studies have shown that, for each hour of informal learning, businesses get a productivity increase of around 1%, while employee wages increase around 0.5%. More importantly, employees reported better job satisfaction, better performance, better career prospects, lower professional anxiety, and an increase in loyalty (one of the well documented benefits of staff training is a lower attrition rate).  

Differing perceptions 

Interestingly, some employers in the study had a different point of view. A small percentage considered education and training a distraction from core work tasks, or even (paradoxically) evidence of a lack of professional dedication. The numbers suggest that a) these views are a diminishing minority, and b) they’re more likely to be expressed by the parts of the business directly responsible for training and recruitment, rather than operational managers. Make of that what you will. 

Some employers also expressed concerns that, by training and upskilling their employees, they were increasing the chances of job-hopping and defection. In fact, the numbers seem to suggest the opposite. Research shows that it’s a lack of professional development opportunities that leads to career change, rather than the other way around.  

So, should you hire externally?  

None of this is to say that you shouldn’t consider external talent, or that external recruitment can’t outperform internal promotion. But the numbers suggest that ongoing professional development does have an edge when it comes to performance, cost and long-term employee satisfaction. As with most things, businesses will probably use a combination of training and recruitment to fill their relevant skills gaps. That’s not going to change. What might change is the subtle balance between the two. As time goes on, it’s going to become more and more clear: invest in your people, and they’ll pay you back with interest.  

For more information on lifelong learning and professional development opportunities, check out how RMIT Online is working to transform businesses.