Internal hires are known quantities. Don't assume they can only do what they have done before.
Investing in in-house talent is much more efficient than bringing on new people. This is clear if you look at CEOs. In 2010, according to Booz & Co., internally-promoted CEOs delivered a return of 4.5% compared to the paltry 0.1% produced by expensive imports. Booz has tracked these numbers for years and while they change a little, the trend remains the same. Internal hires are long-distance joggers; they know the culture, and the ropes. That frees them up to hit the ground running and to concentrate immediately on critical strategic issues.
But I'd argue that what holds true for chief executives is more broadly true for almost all employees. Whenever you can it's more efficient and far more rewarding to develop talent internally.
People want to grow, and they will if you let them. Give people big challenges and they usually rise to them. That doesn't mean throwing people in at the deep end. It does mean providing the training and mentoring any employee needs to acquire new skills. This is a much better use of cash than headhunters.
Does that mean you should never hire new talent? Of course not. New companies often need more people. And growing companies always need more ideas, talent, and experience. But you should think twice before expecting the solution to a problem to lie outside the company. Every external hire takes time and money to identify, for that person to get acclimated and find her feet once on board, and to position herself internally. You can't take the loyalty of a new employee for granted and, just as you can make a mistake hiring her, she could have make a mistake in coming.
By contrast, internal hires are already relatively known quantities. They've demonstrated commitment. They know the business. The mistake many managers make is to think that all they can do is what they have done. That lack of imagination can be costly if talented people leave for lack of opportunity.
I remember when a former employee came to me to say he wanted to leave because he thought he'd gotten about as far as he could within my company. I had failed to spot his ambition and had never asked myself whether he might do more. That was my mistake. When he brought it to my attention, I discussed with his manager what else he might be able to contribute. For the next five years, he did magnificent work for us, his options vested, and he paid for his house.
Don't get me wrong. I have plenty of friends among recruiters and know they can do a great job. But the best companies use them sparingly, recognizing that investing in training and development yields loyalty, commitment, and the passionate alignment of personal ambition with the company's success that every CEO dreams of.