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One of the most important developments in talent acquisition is completely OG, an old-school idea with a number of interesting new wrinkles.

As companies continue to put hiring pauses in place or even lay people off, they are also scrambling to find internal talent with the skills to meet their shifting business needs. Sound familiar? It should. It’s exactly what happened in 2020 at the beginning of the pandemic when internal hiring — or internal mobility, depending on who’s speaking — was thrust into the workplace spotlight.

While this is a new practice for some recruiters, it is also an approach with a lengthy pedigree.

“In the era of lifetime employment,” says Harvard Business Review, “from the end of World War II through the 1970s, corporations filled roughly 90% of their vacancies through promotions and lateral assignments.” Today, the figure is a fraction of that.

But internal hiring is making a comeback — according to the recent LinkedIn 2023 Future of Recruiting report, 75% of talent acquisition pros say internal recruiting will be an important factor shaping the future of recruiting over the next five years.

Why? Internal recruiting costs less and requires less time than external recruiting. It improves retention and bolsters employee engagement. It helps retain critical institutional knowledge. And, as companies learned during the early part of the pandemic, it can provide flexibility and agility when a company needs to change direction quickly. 

But it is not a panacea. As more and more companies begin to explore how to tap into the promise of internal hiring, they should also be aware of the potential pitfalls.

Here are five issues that come with internal hiring and tips on how to resolve each of them:

1. Managers hate losing high-performing employees whom they have spent time teaching and training

The reluctance of managers to let go of their best performers was cited as the top barrier to internal recruiting by the talent professionals surveyed by LinkedIn. But as Chuck Edward, the corporate vice president of human resources at Microsoft, says: “None of us gets to ‘own’ an employee. If someone’s hiring an employee from your team, that’s not poaching. That’s two managers collaborating for the win of the company.”

Cisco created an in-house posting system called Pathfinder in the early 2000s. Managers grumbled that this encouraged their best team members to move elsewhere in the company. Cisco’s leadership responded that managers who didn’t want to lose employees should get better at managing them.

So, give your managers a good reason to embrace internal recruiting. Share data and anecdotal evidence that points to how it lifts the company and, ultimately, them and their teams (and remind them that they, too, can look for talent internally). Consider making internal recruiting part of your performance reviews — and offer incentives to managers who facilitate internal recruiting rather than fight it. 

2. Departments make their problem employees someone else’s problem

In the golden age of internal hiring, managers sometimes moved underperforming employees elsewhere in a large company. This practice kept managers from having to fire employees or even draft a performance improvement plan. It also allowed companies to keep the implicit promise of lifetime employment.

Sometimes incompetent employees were even given a pseudo-promotion, dubbed a “lateral arabesque,” with a new and longer job title — and an office in a remote part of the corporate campus. Other times veteran employees were “kicked upstairs” with a promotion and new role that kept them from being a roadblock to progress.

All of this can be avoided by creating a formal process for internal recruiting that starts — and this is critical — with posting open positions on an internal job board. After that, scrutinize internal candidates the same way you measure and judge external candidates.

And given that any one person’s knowledge of a specific workforce is limited, companies will enlarge the pool of candidates by posting rather than relying on personal networks. They will also reduce the possibility of overlooking an extraordinary internal candidate.

3. Informal recruiting can lead to underperformance

Part of the allure of internal hiring is that it just seems to make sense: Companies are hiring employees who have already shown they can fit in and perform well. It’s foolproof, right?

Not really. A study published in Harvard Business Review of 11,000 internal hires made at one Fortune 100 company found that employees hired through informal relationship-based referrals (what the report calls “sponsorship”) underperformed on a whole range of measures when compared with those who were hired through more formal processes (posting). The HBR results echoed a study by CEB that found 40% of internal hires involving high-potential employees end in failure.

What’s going on? In some cases, high performers may have been working to the extent of their potential and struggled with new positions that required skills and traits they didn’t possess. The Peter Principle famously proclaims: “In a hierarchy, every employee tends to rise to his level of incompetence.”

So, companies that want to do more hiring from within should make sure they are asking internal candidates to go through the same interview process and skills assessment that are used with external candidates. This levels the playing field for all candidates. If an internal candidate is the top pick but doesn’t have all of the skills necessary for the role, the recruiter can recommend that the hiring manager connect with their learning and development (L&D) partners. They can help the internal candidate develop the skills needed to be a success in their new role.

Companies should also consider developing a database in their human resource information systems (HRISs) that allows them to keep tabs on what knowledge, skills, and abilities (KSAs) their workforce already has. Clearly, a KSA database can help identify current employees who might be a good fit for positions just opening up, but it can also be a tool to chart what skills the company needs to develop or recruit for.

4. Diversity is hampered and fresh perspectives become the exception rather than the rule

A reliance on internal hiring, particularly if done with an informal, relationship-driven process, can result in a stagnant culture that is insulated from innovation and industry best practices. 

Your internal recruiting should mirror your external recruiting: It should begin with proactive outreach to internal candidates who you’ve identified as potential fits and should feature exactly the same level of assessment and review that an external candidate would receive.

This is about hiring the best person available, not about rewarding a favorite employee with a new role and new title — as noted in Section 3, that may not work out well for anybody.

5. Internal recruitment can raise employee expectations and create resentment if not handled well

One of the biggest perils of internal recruiting is that employees who are considered for an open position but are then passed over may feel frustrated or even bitter. At that point, internal hiring can start contributing to an attrition problem rather than helping to solve it.

Which is not to say you should fall back on an exclusive diet of external recruiting. Build a transparent hiring process with a clearly stated set of policies and make sure your internal candidates, whether actively recruited or self-identified, understand how it works. Underscore that the assessment process is forward-looking and doesn’t reflect on the work they’re currently doing.

Give your internal candidates a great candidate experience. If they’re not selected for the open position, let them know, as quickly and diplomatically as possible, that someone else has landed the job. Hiring managers can even coach candidates, giving them feedback on how their interviews and assessments went and tips on what skills or knowledge to develop to ensure success in the future.

Make sure, too, that internal candidates understand that the hiring process is about getting the best candidate for upcoming work and is not about rewarding them for past efforts and accomplishments. This is easier when you have other ways to reward them — raises, bonuses, or employee recognition programs — and you can offer them help on advancing their careers with training, mentorships, or job rotations.

Final thoughts: Recruiting and L&D are the new power couple

Recruiters don’t have to go it alone as they start looking at internal talent to meet their companies’ needs for emerging skills, from AI to cybersecurity, data analysis to customer relationship management. You’ll have a larger talent pool if you think about developing talent for future skills rather than recruiting workers with fixed skills.

More and more companies are seeing stronger relationships between their talent acquisition and L&D teams. LinkedIn’s 2023 Workplace Learning Report found that nearly half (47%) of L&D professionals globally say they’ve developed a deeper relationship with talent acquisition over the last year. 

So, when the talent acquisition team partners with L&D, they can make sure the company is creating or acquiring curriculum that fits the organization’s ongoing needs. And it’s not only good for the company, it’s good for employees because you’re investing in their development and future too.

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