Internal Staffing of Human Capital and Performance Stability

In recent years, we have observed increasing employee mobility and firms’ greater reliance on external labor markets to staff positions (Cappelli, 1999). Jobs that used to be filled with internal employees are now open to external candidates, and internal and external candidates compete with each other across all levels of organizational hierarchies to gain employment (Bidwell, 2011; Royal & Althauser, 2003). To date, research on how different types of mobility affect firm-level performance outcome has been limited, especially when firms combine both approaches to fill jobs.

This paper examines the performance implications of internal versus external staffing of human capital. Based on the argument that internal staffing increases strategic persistency, employment predictability, and performance consistency, I show that internal staffing of human capital is associated with less variation in revenues and profits across a 3-year period. Such stability, however, works as a double-edged sword when an organization faces an external shock (i.e., the 2008 financial crisis) by reducing revenue. There was no significant difference in profits between internal and external staffing approach.

The context of this study is the staffing strategies of U.S. law firms from 2002 to 2010. Law firms are an excellent context for my investigation as they constitute a knowledge-intensive industry that has historically relied on internal labor markets. Law firms were once famous for their strong internal labor markets (commonly referred to as the Cravath model), in which most entry-level lawyers were recruited from law school, then groomed and socialized to have a strong sense of collegiality and commitment to the firm (Brill, 1990). More recently, heightened competition and cost pressures from corporate clients have pushed law firms to abandon their traditional system and to engage in lateral hiring as a faster way to acquire specialized expertise and clients and to increase revenue.

This study shows firms vary to a great degree in the extent to which they combine internal and external staffing and these choices have a significant impact on performance stability. Although the movement away from internal staffing to external sourcing of human capital has been widely document, I suggest that internal staffing of human capital is still relevant and important for firms.