Hiring externally is never a simple solution to an organization's problems. It's more dependable and cost-effective to develop your own transformational leaders and use them to fill senior positions. They will cost you less and are often better prepared than an outsider.

Wharton research shows that hiring externally can cost 18-20 percent more than promoting from within, yet performs worse in the first two years. And Harvard research shows that hiring externally to replace a retiring CEO drives an approximate six percent drop in performance.

Although these examples below are high profile large companies, hiring externally can have an even more devastating impact on a small company. They typically have fewer resources to develop internal talent and rely on external hiring as a crutch even more.

Ultimately, hiring from the outside is a gamble. It's bringing someone in who looks good on paper but may not fit. This can have catastrophic consequences at the CEO level.

A few big-company examples

I was once having dinner in a local restaurant, and the entire restaurant suddenly quieted. The new CEO of the largest employer in town and his team walked in. You could sense the tension.

At the time, I worked for a 150-year old athletic apparel company, Russell Corporation, which had a history of developing internal talent and promoting from within. Although the company had past success, shareholders were concerned about new challenges on the horizon. Instead of promoting someone they had spent years developing, they hired an executive leader from a competitor.

Soon major position changes were being implemented, and there were new faces on the executive team. The new CEO relocated the corporate office to a bigger city three hours away.

It wasn't long before the collaborative family culture was upended, and revenue began to drop. Russell Corporation went from a $1.25 billion company in 1995 to eventually being sold to Berkshire Hathaway in 2006 for a mere $600 million.  

It wasn't completely the outsider CEO's fault. There were plenty of other factors at play. But, it's important to note that when organizations run into problems (or even potential problems), there's often a knee-jerk reaction to hire externally and "shake things up."

This can have disastrous results. Also see:

  • JC Penny hired a leader from Apple, Ron Johnson, as CEO. The stock price rose to $43 then plummeted to $22 by the day he was released two years later.
  • HP hired seasoned executive Carly Fiorina from Lucent. The stock price went from $45 to $21 in six years.  

In all three examples above the leaders had significant success in their previous organizations, but this did not transfer over to the new organization. The disruption caused substantial losses.

Why do outsiders fail? Research featured in the Harvard Business Review from professor Joseph Bower shows:

"An outsider often did not know the industry or its suppliers, customers, or competitors, nor did they know the capabilities of the company and its people. While they might be good at cutting costs, they rarely knew enough to manage growth and innovation. Often outsiders would "clean up the company" and then sell it. While shareholders might benefit, the company was lost as a competitive force in its field."

If you already promote from within, support them so you do not have to hire from the outside down the road. If you normally default to hiring externally, try these five strategies to develop your internal talent:

1. Train insiders to be objective.

Avoid "group think" within your leadership ranks by training your leaders to question the status quo. They will be better equipped to embrace innovation and make big moves when necessary. Often this can be accomplished by giving them a different perspective through an overseas or field assignment.  

2. Retain your top talent until you need them.

You can retain up-and-coming leaders if you demonstrate there is an opportunity to advance. There is a tendency to make big announcements about external hires, yet much less fan fare around promotions. Highlight promotion examples throughout the company, not just for external hires.

3. Create a succession plan for leaders at all levels.

Too often succession planning is limited to the executive ranks. Identify and address any potential lean areas of leadership by creating succession plans for all levels, including front line managers.  

4.Take the long view and developing a leadership pipeline.

After you begin addressing your immediate leadership need; it is crucial to think long term.  The best time to consider your leadership pipeline today was 5-10 years ago. Leadership development takes time, experience, and training.

5. Convert outsiders into insiders.

According to Wharton research, after two years outsiders get promoted at faster rates than insiders. So, hire outsiders as successors in waiting.  Give them time to learn the ropes before they are needed to step up.