Leadership and talent succession is a touchy subject for many organizations. Most have a tenuous grasp on who, where, and how to hire replacements for key players, often with the intent of spending large amounts of money on hiring on senior staff.
The high-demand for skilled leaders has led to a commodity market, where talented individuals often have too many offers to count and bringing any of them into an organization will be costly.
For this and other reasons, organizations are increasingly adopting internal development as their primary succession management strategy, as pushed by influencers like Ram Charan and Stephen Drotter.
If you’re considering doing the same, it’s important to consider the pros and cons of both before adopting a single strategy.
Cost of Hiring vs. Developing Leaders
Hiring a leader for any type of senior position can be exorbitantly expensive. With few leaders on the market, many will find themselves deluged with offers. You’ll have to offer high in terms of compensation, environment, and interest/challenge to get anyone to consider your organization.
Developing leaders internally can be expensive as well. Investing in individual development often means training, mentoring, coaching, assessing results, using assignments to broaden experience, and continuing to follow up to ensure the individual is moving in the right direction.
This can be quite costly but will vary depending on the individual and the role. Internal development also means taking on risk, because if the individual leaves your organization, they aren’t delivering a return on any of that investment.
Culture Fit and Culture Awareness
Some organizations prefer to bring external leaders in to add new insight, new ideas, and new concepts. This can be extremely beneficial in that leaders with insight and experience in outside organizations can have a better view of what you’re doing, what markets are like, and can bring a broader range of experience to your organization. This can pay off.
However, it is also a risk. For example, Ron Johnson was brought onto Apple, where he greatly improved processes and increased profits for the organization. Attempting to do the same thing at JCPenney, he displayed a marked misunderstanding of the organization’s target demographic and their stocks dropped by 51%.
Internal hires are brought up inside your organization. They know how things work, why things are the way they are, and if you’ve handled development correctly, they have a deep understanding of your organization at every level. This can enable application of the Shuari principle of understanding and mastering before making changes to improve.
CEOs like Microsoft’s Satya Nadella, who worked with Microsoft since 1992 are good examples of successful applications of using internal development for leadership pipelines.
However, internal development has its own risks. People could leave. Internal people often don’t have external insight and might miss key flaws or bottlenecks preventing growth. And, internal people are less likely to create needed change.
Hiring externally means that every one of your hires will have had the chance to pursue a range of experience and roles in external companies. This can include one or numerous other organizations which means that an external person will almost always have more diverse experience.
Developing leaders internally offers other advantages. Here, you can optimize development and experiences to meet the needs of a role through assignments, training, promotions, leaders, and coaching. You can, in short, design what you believe is the perfect leader based on assessments and job profiling.
Internal development is a valuable strategy that can help you to develop leaders, increase the availability of candidates for roles when positions open, and improve the quality of hires. However, it shouldn’t be a sole strategy. In most cases, both have obvious pros, cons, and limitations, so a mix of the two strategies is likely to deliver the best total results.