by Bryan Hong
A widely held belief among business strategists is that human capital—the knowledge, skills, and abilities within individual employees—is one of the most important sources of competitive advantage for firms. To acquire knowledge needed to compete with rivals, firms have become increasingly dependent upon hiring talent from outside the firm, especially for managerial and technical expertise. However, recent evidence suggests the failure rate of external hires is astonishingly high–roughly 50% of external hires fail within 18 months, both at the managerial level and below. One popular explanation is that recruiting practices themselves are to blame, and fail to find the right people. However, in my recent study forthcoming in Strategic Management Journal (https://doi.org/10.1002/smj.3182), I consider another possibility—maybe organizations aren’t being structured the right way to benefit from the talent they are hiring.
When firms hire talent from outside the firm, the knowledge and skills new hires possess contributes to the firm through what they do. In other words, a newly hired employee who is unable to use their skills also contributes nothing new to the firm’s performance, regardless of their talent or abilities. If firms truly want to benefit from their new hires, they must give them enough authority to make decisions. This point may seem obvious, but is often ignored or assumed to not be a serious issue in the HR strategies of many firms. Using novel data for a sample representative of the Canadian population of businesses, I test whether the success of new hires depends upon the degree of authority they are given.
In the study, I test external hiring and its effects for two types of employees: 1) managers and 2) high-skilled non-managerial employees. For newly hired managers, I test whether greater authority increases the likelihood of major organizational changes (e.g. reorganizations) occurring within the firm after they are hired. For high-skilled non-managerial employees, I test whether greater authority increases the number of new product innovations produced by the firm after they are hired.
For each case, I find that authority makes a significant difference in whether new hires contribute to the firm. The more authority that new hires are granted, the more they can make a difference in the firms where they work. Newly hired managers are more likely to implement organizational changes, utilizing the knowledge and experience they have acquired elsewhere. For high-skilled non-managerial employees, new hires can better aid in the development of more product innovations that are new to the market, based upon their expertise gained from outside the firm. Also, deciding who gets authority within the organization for tasks is not a decision that is “frozen” over time. As firms adapt to different environments over time and require different types of knowledge to compete with rivals, authority may need to be reallocated to employees in different parts of the organization, depending upon the knowledge required. The findings offer one important (and overlooked) explanation for why new hires so often fail to meet expectations: The organizations where they work fail to give them enough authority to utilize their knowledge and experience. This is largely the product of an incomplete understanding of how hiring leads to firm performance, where often the belief is that simply hiring great people leads to great outcomes. In my study, I show that it’s not just about having the right people, but also what the organization lets its people do. The best performing organizations don’t just have great people, but also know when to give them the authority they need.