Having worked with organisations who take different approaches as to whether they opt to develop from within – ‘build’ – or hire externally – ‘buy’ – and as much as I want to give you a definitive answer as to which is best, it really does depend on the company and role in question. In this article, I want to explore the merits of each while highlighting some of the mistakes I see companies making.

Firstly, selecting an internal candidate to take the step up to a senior leadership C-Suite role makes sense on a number of levels. It sends out a positive message that the company believes in its people, which in turn improves engagement and retention. And we know how important that is in today’s skills short market. The argument for bringing in someone from the ‘outside’ is that you want to find the best possible person for the role from a bigger talent pool so that you don’t miss out on a potential superstar hire.

My personal view when looking to hire for a leadership role is that the internal route should always be your starting point. You would look at your succession planning to see who could fill the position now or in the near future. And you need to prepare for two scenarios: 1) who is ready to take the helm in an emergency and 2) who will be ready in the medium to longer term. It could be the same person of course. Remember to think about how that C-Suite role will look in say two or three years’ time as this will affect the person’s development and learning journey. This often gets missed.

Now one of the main reasons why organisations often pursue the external route is precisely because their succession plan is either non-existent or not robust enough. They don’t have someone for the two scenarios mentioned above and aren’t able to appoint someone internally.

In a nutshell, start internally first and if you have nobody on your succession plan, you can go out to the market to embark on your search. Let’s summarise the advantages of both in more detail.

The internal candidate: ‘a known quantity’ 

An internal hire will have an in-depth understanding of your products, services and customers and have built up internal and external stakeholder relationships. They’re a known quantity, you know what they do well and the areas they need support on. There is less risk of mishiring. The evidence also tells us that the vast majority of leaders transitioning into CEO roles are more successful if they’re internal hires. And when you promote from within, you’re  creating opportunities for those further down the talent pipeline to move up into new roles, so you get a ‘trickle down’ effect.

Another consideration is the availability of external talent. Making internal candidates jump through the same hoops as part of the selection process for fear of missing out can prove a false economy. Often given the nature of roles that are in a fairly niche sector perhaps means that external candidates who can fill the role will be very few and far between given prevailing talent shortages. Organisations and hiring managers think that by going external, they are more likely to find that breadth of experience, then they look at the shortlist to find that all the candidates work for immediate competitors and have a similar background to their own people.

A CEO’s view can also get clouded by historic performance rather than  future potential, so bias and prejudice can creep in. So this perception can go against the internal candidate, which explains why the majority of C-Level appointments are made externally even though research would suggest otherwise. The default is to look externally as the widely held view that is that the step up to C-Suite level is incredibly difficult to make, ergo you need someone from the outside!

And finally, there is also a cost implication. Apart from the search agency fees, an external candidate will come with a salary premium given demand forces. A lateral hire would also expect a bump in salary (that’s not to say that you’d pay internal promotions below market rate but perhaps not as much as external hires).

The value of external experience  

An internal candidate may lack the necessary skills to handle the added remit and responsibilities of the new role. If they have grown up in the organisation, they won’t have had experience of working in different industries for example.

So there can be a real benefit to hiring externally, including improvements in diversity. And especially in the case of a lateral hire, the external person will usually hit the ground running and get up to speed fast, so there won’t be a need for further development (apart from obviously improving their knowledge of the business).

Also, a fixation with internal promotions can create a degree of complacency or entitlement as individuals will expect to get promoted. Looking outwards says that you want to find the best people for your strategic critical hires. Just because you’re on the succession plan doesn’t give you the right to a promotion – you have to earn it! And given the rapid pace of change in tech and AI for example, roles are evolving significantly, so you might not have that capability internally anyhow.

Another limitation of the ‘build’ approach is that hiring managers will often plump for the number two or trusty lieutenant, the steady pair of hands you can rely on, who is well liked etc. The problem with this approach is that this is no indicator of potential. Do their experiences and leadership behaviours stack up to perform when they make the step up? This individual will typically be used to carrying out and executing the decisions made by their superior, albeit they may have had some input. The two roles require different skill sets so you need to have a clear understanding of what that potential means in your build strategy if you want to have the right people for that transition.

The case for ‘borrowing’

The other reason to bring in someone from the outside is if you’re going through a transformation or taking a different strategic direction. This might require you to recruit someone to lead that business critical programme, so you would look for an experienced interim and ‘borrow’ their  specific skills for a set time period to deliver on the project. The benefit here is that not only are you getting exceptional expertise, which will be handed down to your teams, but it also doesn’t divert your other internal resources, unless you feel it’s a worthwhile development opportunity.

‘Build’ vs. ‘Buy’ – decision time

It comes down to doing all you can to make sure you have best people in your most crucial roles. There are pros and cons to both internal and external hiring as discussed above.

Often, I see clients try to do both but for the wrong reasons. They have an internal applicant for a senior role whom they already know is not right for the role, but they put them on the shortlist anyway along with external candidates as it is easier than having a tough conversation; They can then always blame the external recruiter if they are not selected!

Hiring managers often start on the right footing which is to think broadly but they de-risk the potential of hiring the wrong person. They end up choosing someone working in a similar organisation and culture. They overly filter their pool of candidates far too early in process, often seeing one or maybe two candidates for assessment who are doing exactly the same job for a competitor and ignore those who could be a potentially great fit. This is a very common occurrence.

On the other hand, promotions shouldn’t just be dished out because you’re worried people will leave and you want to boost retention. Particularly at a senior level, you need to have honest  conversations. If you don’t think the internal person is right for the job tell them the reasons why rather than putting them on a shortlist and filling them with false hope that they could be in with a chance. “We really value you for what you’re doing, you’re a great CFO, we want to support you to be the best version of yourself and keep you. But not in the direction of being our next CEO.”

Ultimately you want to invest in developing leaders and provide the experiential learning they need,  which you need to do early to build if you want to build a robust internal talent pipeline. But keep an open mind when going external for the reasons outlined. These decisions must be made objectively and free of emotion to select the best and right people for your senior exec level roles.

If you’re doing your job on succession planning and leadership development correctly that person should already exist in your organisation. But often either the timing isn’t right or individuals haven’t been ‘stretched’ enough. And inevitably, organisations are forced to look elsewhere.