The Predicament of Talent Acquisition: Develop In-house or Purchase Externally?
In the realm of organizational growth, the question of whether to invest in existing employees or seek out external talent has lingered. Legendary thinker Peter Drucker once posited that the purpose of an organization is to enable ordinary individuals to achieve extraordinary feats. This concept encapsulates the core query: should businesses prioritize honing their current workforce or opt for an aggressive approach of replacing lower performers with elite talent?
In today's rapidly evolving technological landscape, there's mounting pressure on CEOs and HR leaders to boost productivity and streamline operations. The allure of snatching high-performing talent may seem like a straightforward solution, but it's not as straightforward as it appears.
Measure for measure, our ability to recognize and select talent carries its fair share of foibles. For instance, organizational psychologist Tomas Chamorro-Premuzic's fascinating book, "Why Do So Many Incompetent Men Become Leaders?," delves into the intricate relationship between confidence and competence. Or consider the 'babble effect,' where individuals who talk more within a group setting are more likely to be appointed as team leaders.
It's not just about identifying promising talent either. A Harvard Business School study on Wall Street financial analysts underscores this point. The study demonstrates that analysts who leap between firms face a performance dip that takes years to recover from. Buying the best talent available doesn't guarantee an outsized boost in performance, particularly if the firm fails to create an environment that nurtures their capabilities.
So, there are two primary paths companies can explore to enhance firm performance:
- The "buy strategy," which adheres to the 80/20 rule and suggests axing the least productive 20% of employees and replacing them with top-tier talent. The tantalizing allure of this approach lies in its simplicity - identify poor performers, swap them, and watch productivity soar.
- The "developmental approach," which centers on the idea that organizations prosper by fostering a culture that prioritizes learning and growth. This approach zeroes in on constructing resources and spaces that calibrate skills and abilities rather than obsessing over human unicorns.
Let's take a closer look at these rival paths through the lens of a hypothetical diversified manufacturing company with 80,000 employees and $30 billion in annual revenue.
The Fire-and-Hire Strategy
Envisioning a need to upgrade performance, our manufacturing CEO pioneers the "buy-in" approach. Inspired by the audacious 'rank-and-yank' approach employed by tech-savvy companies, she marches on with ousting the bottom 5% of employees (4,750 individuals) and simultaneously swaps them out for high-caliber talent on the market.
But firing and rehiring isn't sans costs. These charges pile up via severance fees for the let-go employees, recruitment, training, and onboarding expenses for the new hires, and acknowledged losses while the new hires familiarize themselves with their roles. In total, this strategy sets our budget back around $775.35 million.
To recoup these costs and surpass the previous profits, the new hires' performance must outshine the average by a substantial margin. Can they manage to produce double the profits of an average employee in year one? The outcome: A deficit of approximately $200 million.
Three times the average performance level? Net gain of $94 million. Only if these new hires are even capable of performing at four times the average rate would this strategy be fruitful.
Embrace Development and Growth
In a parallel universe, the same manufacturing firm takes stock of research demonstrating that external hires often require three years to reach parity with internal promotions, yet command higher salaries. The CEO of this savvy company decides against spending money on chase-and-catch talent tactics. Instead, she double-downs on training and high-commitment management practices that have been proven to deliver bottom-line returns.
Convincing her team to invest roughly $80 million in training, the CEO hopes to lift the performance of middle performers (60,000 employees) by a few percentage points. Seemingly modest, but when these performance increases are averaged across the workforce, the profits surge close to $100 million.
By focusing on training and enhancing the performance of existing employees, businesses can prioritize long-term success over the uncertain returns from 'fire-and-hire' tactics. Instead of relentlessly pursuing the search for human superstars, companies should view their workforce as a reservoir of potential to be released.
So, should companies build or buy talent? The decision hinges on which strategy aligns best with the organization's needs, values, and long-term goals. While hiring top talent is an essential component of strategic growth, investing in the development of current employees must never be overlooked. Ultimately, the key is to sculpt a work environment where human potential is celebrated, cultivated, and step-by-step unleashed.
- To address the challenge of enhancing productivity, the company should consider both recruitment of external talent and staff development approaches.
- The 'buy strategy,' advocating for replacing underperforming employees with elite talent, could potentially improve productivity, as demonstrated in the Harvard Business School study.
- However, the severance costs associated with the 'buy strategy,' such as recruitment, training, and onboarding expenses, can be substantial, as seen in the hypothetical manufacturing company scenario.
- The 'developmental approach,' focusing on employee learning and growth, can yield substantial profits by enhancing the performance of middle performers through training, as demonstrated in the alternative manufacturer's hypothetical scenario.
