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How to Decide Between Insiders and Outsiders in Leadership Roles

16.03.2021 18:00

Insider or Outsider Executive Recruiting

Executive selection and appraisal is of enormous importance and probably more complex than many of you might assume. In addition to the qualification, experience, personality and potential of the desired profile, a fundamental consideration must be made at the beginning of the recruiting process. Would you rather decide to select an internal talent or recruit an external candidate? Selecting an internal candidate for the open executive position means taking a high-potential leader who already works in the company for the job. The reasons for this type of insider recruiting can be very diverse. In contrast, recruiting among talents who are not yet working in the company is called outsider recruiting. Empirically the two different options of executive recruiting are not yet very elaborated. One trend that however has been investigated so far is, that it is more common to find talents in management positions at C-levels who have worked for the company before and have been selected through internal assessments or succession planning processes. These findings are currently based on a few studies from the USA and Germany. The result in a proportion of internally recruited leaders versus externally recruited executives of 70 % - 80 %. Hence, more than twice as many top managers are promoted within the company, than brought in from outside. At first glance, this sounds like a lot, but since the general advice is to always give priority to your own employees whenever possible, the question arises as to why this is not done in such a large number of cases? So, the key question is the following: In which situation it is suitable to choose the external recruiting of top management rather than the internal executive recruiting and vice versa?


Best Practices and Benefits of Different Executive Recruiting Scenario

One of the benefits of internal executive recruiting which is often mentioned is, that your own employees need to see opportunities for career advancement and succession planning within the company. Thus, the internal recruiting of top management meets the needs of the own employees and promote a healthy competition among the talents of the company. It can be a key motivational factor according to competition-theory. In addition, the applicant already knows the processes and culture within the company and will therefore fit in more quickly. A shortened and smooth onboarding period is one of the main benefits. However, there are certainly also negative points to counter this. First, by promoting an internal high-potential talent, the previous role is still open and the staffing problem is not completely solved. This could hypothetically be taken any further (*): When a new top management position is created, an additional leader should be recruited for this new role in the company. The experience and leadership skills of the right candidate might be one of the most important factors. About the competencies of a talent, it can be said that although an internal talent is already familiar with the processes, culture and products of the company he or she most likely has no experience in the respective position and can be affected by a phenomenon called operational blindness. In addition, the pool of talents internally for the selection is usually limited.

Many of these disadvantages are remedied by external recruitment. For example, although a new talent does not bring any specific company knowledge and there is a risk that he or she will not fit in with the corporate culture and colleagues, the external talent brings new impulses and experience and thus, might counter the operational-blindness-theory. One disadvantage of external executive recruiting are the higher costs, both for the recruit and for the onboarding period. In the end there are negative and positive arguments for both ways of executive recruiting. On a theoretical basis there is no evidence supporting the recommendation towards internal executive recruiting.

Hence, which approach do I choose when I am faced with the decision of filling an executive role? To make this decision different factors should be considered, which might moderate the aspects mentioned earlier. For example, the size of the company influences the impact of the operational blindness. A larger company requires more than a small one to know operational procedures, contact persons and culture. In a larger company, the new executive may also be able to meet the staffing requirements that an internal talent recruiting entails and thus utilize the cost benefits that internal executive recruiting promises. In addition, since there is more competition in a large company due to a larger number of colleagues, there is more motivation in a large company according to the competition theory, which is created by competitive thoughts. Another influencing factor would be the success of the company. If the business model is running well (*), oe should think about selecting someone for a management position who is familiar with the existing processes and handlings. The reverse is true if a realignment is needed. This can be achieved through external executive recruiting. (*) If a management position is created for a company function that did not exist before, internal executive recruiting obviously does not make sense.


Takeaways for the next Executive Recruiting

The practices and considerations show that a general preference for internal executive recruiting, which appeared in the past, cannot be justified. Rather, these arguments should be weighed up with regard to the specific influencing factors in one's own company. This means, for example, internal executive recruiting makes sense, because competition for promotion within the company creates motivation, but only if there is enough competition in the first place. Or, an internal recruitment makes further sense, because internal processes and handling are already known, but only, if these processes were successful in the past. In the future, with these considerations in mind, companies might think about the alternative of external recruiting once in a while.

Anna Koziol


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