At a glance

• Promoting employees and hiring new recruits externally both have benefits and downsides, but many SMEs can struggle to find the balance between the two.

• Offering employees opportunities to develop their skills and progress their careers is vital, plus promoting internally can be quicker than hiring externally. However, be careful not to over-promote people beyond their capabilities.

• Take the time to review your business plan regularly, looking at your current employees and their skills to highlight any expertise you may need to bring into the business from outside in order to achieve your strategic goals.

As an SME owner, you may find yourself asking, is it better to recruit internally or externally? The answer is it’s critical to balance the two because there are pros and cons to both. All organisations must develop their employees through internal promotion, as well as recruiting external people with fresh skills, ideas and approaches.

Achieving this balance is vital for effective growth and could impact the attractiveness of your business ahead of an exit. But SMEs often find it hard to balance internal and external recruitment, relying too much on one or the other.

Pros and cons of internal recruitment

Employees want to feel they’re growing and developing in their role and career, including through promotion. They won’t stay long if they can’t – 2022 data from Pew Research Center shows lack of advancement opportunities is a top reason for quitting.¹

For the employer, internal recruitment is also a cost-effective means of retaining knowledge and talent, and promotes loyalty and motivation by showing commitment to your people.

It can also be quicker than recruiting an external candidate, as any interview process would take less time and there’s no need to onboard a new employee and wait for them to get to grips with the company.

The problems arise when internal promotions are based largely on the wrong criteria such as nepotism, personal biases or even laziness.

Vicki Field, Director of consultancy FieldHR, says: “In start-ups and SMEs, the founding team can be close. As the company scales, founding team members can be promoted to positions they don’t have the capability or competence for, with negative consequences for the team and the company.

“Companies can also fall into the habit of bringing in junior people under existing team members, rather than proactively looking at the team structure to identify and fill gaps with suitably experienced and qualified people.”

When to look at external recruitment

SME founders often have specific expertise, which means they need to bring in other skills to avoid diluting their focus, explains Helen Thomas, HR Director at outsourced personnel provider The HR Dept.

“For example, I might develop a rocket-propelled pen, but not know how to manage the production process. Putting me in charge of that production would waste my skills,” she says.

Helen recommends reviewing your business plan regularly, including what individuals you have and whether their skills and experience match the business’s needs as it grows. It may take longer, but recruiting people with the experience you need from the wider market, rather than over-promoting someone from within, should help you grow much faster.

“This is a common mistake in technology firms, for example,” says Helen. “You may have a brilliant techie promoted to team manager, but they don’t have the right communication and problem-solving skills for that role. Just because you’re good at one thing doesn’t mean you’ll be good at managing others doing it. Maybe you can learn and develop management skills and enjoy that role; maybe you can’t.”

However, Helen also warns against under-promoting by limiting people to specific delivery roles just because they’re excellent at them. Those people may want to develop and expand their roles. But if you haven’t talked to them about their ambitions or wider abilities, or tried to develop them, you’re likely to under-use or even lose them.

Structured appraisals are crucial to make sure you understand what each individual wants, she adds.

Recent research from Gallup² found a top motivating factor for employees is being in a job that aligns with their strengths. Appraisals can help ensure that happens.

How and when to promote internally

Vicki recommends reviewing your company’s organisational structure to ensure it best aligns with the business plan. Alongside the appraisal process, consider the performance and potential of each person in the company. You can do this in a nine-box grid giving a low, medium and high score for performance versus potential.

Only promote those with high performance and potential, she says. This process will also show you the roles for which you need to recruit externally.

However, it’s vital to always advertise vacancies internally. That reduces resentment if an external candidate is successful. But it might also reveal a strong internal candidate that you weren’t expecting and give you more insight into your current employees’ goals and ambitions.

How internal versus external recruitment can affect your exit

Structures and processes that aim to balance internal and external recruitment are crucial because without them, the direction of your company could become stale, as well as hostage to internal politics, unconscious prejudices and nepotism.

Current or future investors and buyers want to see a robust, diversified management team who can take the business to the next level, with no concerns about internal biases. They’re also looking for a cohesive, integrated people-management strategy that aligns to the company’s goals – and that will include a balance of internal and external recruitment.

Such a balanced strategy will show that your company can go far and isn’t just a flash in the pan. It’s one of the key things you need to ensure the eventual saleability of your firm with a strong valuation.

Contact us

If you’re thinking about selling your business, get in touch and we can discuss your options with you.