#ScalingUpWoes: Should you promote leaders from within or hire them from outside?

Every startup faces an inevitable problem during its scaling up journey. When a startup begins to increase in size, its complexity increases. As the complexity increases, you need to create leadership roles to manage both people and functions.

But, as a startup founder, how do you do this? Do you promote some of the early members who have been a part of your founding team, have given their all to your startup and trusted you when all you had was an idea? Or, do you bring in seasoned leaders who have had the experience of helping other organizations scale up? Tricky, isn’t it?

It’s never too early to start thinking about this particular conundrum of adding management and leadership layers in your startup because leaders have an outsized influence on your organization. Having worked with hundreds of companies during my consulting career, I hope to be able to guide you and think through this particular conundrum (the pros and cons of hiring internally vs externally) and help you make some solid decisions.

I’m Rachel Mendelowtiz, founder and CEO of the Rivington Group, which helps organizations of all sizes on everything related to people operations. Until recently, I was the Chief People Officer at Binc, a technology recruiting firm that has helped build some of the most innovative companies such as Airbnb, Dropbox and Reddit. Prior to that, I was a Partner at McChrystal Group, where my team’s work formed the backbone of the New York Times bestseller, Team of Teams. 

While at McChrystal Group, I worked with Fortune 500 clients as well as small and mid-sized firms. At Booz Allen Hamilton, I advised the Department of Defense clients on leadership, talent management and change management. I also ran leadership development at Bridgewater Associates where I trained managers on the skills outlined in Ray Dalio’s New York Times bestseller, Principles. 

You can watch my session here or choose to read the key takeaways based on it (or you could do both!) 🙂

Why founders resist building the middle management layer

What I typically see with small companies is that founders are resistant to building out that middle management layer. If you find yourself in that position, you may be doing it for a few reasons:

Losing the culture: You’re probably worried about losing that culture that you’ve worked so hard to build because it’s so important to the heart and soul of your organization.

Introducing unnecessary bureaucracy: A lot of people start businesses because they came from a bureaucracy and want to start something that is more nimble and agile to avoid a bureaucratic structure. 

Assuming flat = egalitarian: There’s also an assumption, especially in a lot of tech organizations that a flat organization is equivalent to an egalitarian organization.

Typically, these are the reasons why founders delay introducing a management layer in their startups and it works for a while till they become victims of their own success.

Importance of having a middle management

Helps reinforce positive aspects of culture: As your organization grows, you’ll reach a point where you don’t know everyone in the company and the ability to reinforce the culture might feel like it’s slipping away from you a bit. A middle management can help prevent that from happening.

Cost of communication grows with size: The cost of communication when you grow in size becomes very cumbersome and it gets to the point of chaotic. Generally, I see this happening from as early as a few dozen individuals to about 40-50 and absolutely, at 200 employees. Managers are a conduit for very important communication and you’ll start to feel some pain if you don’t have that important layer embedded.

At a certain point, there’s so much information in an organization that sharing it all equally across everyone creates a lot of noise. Not only do managers help pass on the information but also, help translate it the right way. This allows employees to focus on their core work and only hearing what they need to know in the way they need to know. If different sources of information are at play, employees might get frustrated and spend time checking out the reasons behind the contradictory messages that might result in them becoming disengaged at work.

Power dynamics emerge unchecked: This is something folks often don’t think about until it happens to them: the counterpoint to assuming that a flat organization is an egalitarian organization. It does sound that way because we have that power structure built in with a hierarchy.

However, getting rid of the boxes and the lines does not mean that you have gotten rid of a power structure. So, typically power dynamics will still emerge even without those formal boxes and lines that make up a hierarchy. But they emerge unchecked, and they emerge along lines that maybe you don’t want. 

You can have a lot of manipulation and some poisonous behaviors cropping up if those power dynamics are left unchecked. So, it makes sense to formalize a bit as to who is in the position of power so that they can be effective as leaders.

Two general approaches to creating general management layers

There are two polarized general approaches (with each on the ends of a spectrum) that founders usually take when they create the first management layer. Even though it’s a spectrum, I often see founders gravitate to one end or the other.

  1. Promoting strong individual contributors into leadership positions: Founders tend to take this approach to preserve their organization’s culture that has fueled their success so far. They also feel indebtedness towards the early members of the organization and want to reward them for their loyalty.
    This tends to happen because founders believe that their best individual contributors will go on to become the best leaders. Sometimes, this is true and sometimes, not.
  1. Hiring a seasoned management layer: The reasons why the founding team may go for this option is usually because the executives might have reached a point where communication is pretty chaotic, proper systems aren’t in place and they feel that their organizational culture is slipping a bit. They realize they need effective capability to deal with the above, panic and hire a full layer of seasoned managers.
    Another reason this might happen is due to pressure from the investors in your company where they insist that some external candidates are necessary for them to be successful down the road.

Advantages and disadvantages of promoting strong individual contributors into leadership positions:

Pros of promoting from within:

Deep institutional knowledge: The folks that you’re looking to promote to leadership positions have deep institutional knowledge. Small- to medium-sized organizations, when they’re growing quickly, are typically not great at documenting their processes and best practices and/or creating and codifying their policies. Scaling these up becomes tough as a lot of that knowledge is in the heads of your best employees.

By promoting from within, you benefit by retaining that information. It can be really critical to your business and you end up with single points of failure sometimes, which is the flip side of that. However, you’re retaining that institutional knowledge that you don’t have elsewhere.

Committed to the organization: The employees who have been with you from the beginning have seen some of the early bumps and they’ve gone through some tough times in the early stages. They were with you before there was a huge upside. They took great risks with you and therefore, their attachment to the organization is usually deep and values-based. You want to hang on to that.

Upward mobility (helps in retention): Promoting from within signals to the organization the possibilities of upward mobility. This is really rewarding to your early employees and it helps retain people, not just the ones getting promoted but the others around them who think they are probably next in line.

Cons of promoting from within:

Doing ≠ Managing: Prior to managing, we usually spend our entire careers in learning how to be proficient in our technical areas – we’ve probably been to schools and earned advanced degrees. Then, we’re rewarded with management positions but we aren’t trained for that at all. It’s a completely different function which involves helping others do great work, collaborate, create great team dynamics and propagate a culture that will make the organization effective.

Some are lucky to have internal management courses in their organizations while some read a lot of books to understand this function better. However, those becoming managers for the first time have very little education or practice when compared to what they received during the technical phase of their career. These are very different jobs and the assumption that one is going to necessarily translate into the other breaks down when you promote people into management. Not all great individual contributors make great managers.

Organization vs individual growth rates: If your organization is growing really quickly, 50-100% year-on-year or even faster for some startups, the needs of your organization in terms of leadership capability become immense very quickly. If the existing employees are thrust into management positions, it’s going to take years for them to become proficient in this new function, similar to how it worked during the technical phase of their careers.

However, your organization doesn’t really have the time to allow that kind of growth and development of the existing employees into leadership positions. This means the organization’s growth outpaces the speed at which an individual can develop the required skills. 

I’ve seen founders promote from within, which works for some time. Then, the organization reaches an inflection point where the needs of the organization outpaces the rate at which individuals can grow.

Executives stretched too thin: Founders or executives end up stretched very thin as they try to compensate for inexperienced leaders below them and deal with interpersonal issues at all levels. Many times, founders/executives themselves are inexperienced leaders and are ill-equipped to model leadership as well. Executives get sucked into the leadership layer below and are kept from the core of their job – strategy, culture, and driving major organizational decisions.

Once, I asked the CEO of a medical device organization what his biggest problem was. And he said that it’s his leaders coming into his office asking him to solve interpersonal and basic management issues for them where he had to wear the mediator’s hat and get into conflict resolution. He said if they could solve their own issues, then he could spend time on his core job, which was to do with strategy and selling the product. 

Precedent of faster promotions: When you’re communicating to your organization that there’s upward mobility, it does help in retaining people but on the other hand, you are also setting this precedent of really fast promotions.

At Binc, where I was the Chief People Officer, the organization grew really quickly and promoted almost exclusively from within. We had situations where from level one, an individual was promoted to become a director (even above the level of a manager) in three years. So, the expectation was set that employees would get promoted every six months. After a certain point, there’s really nowhere to go in an organization. This expectation quickly turned into job satisfaction and retention issues.

Both the employees who had received faster promotions to leadership roles and those below them had to face the tough realization that the management layers were set for a while and their growth was going to be even slower than those who joined the organization before them. This makes it a tough cultural shift too.

Pros and cons of a seasoned management layer

Pros of external hiring:

Helps institute processes and structure that were lacking earlier: The external seasoned leadership has the capabilities to implement processes and structure at a grassroots level. This is a better option than the founders having to decide if they have a procedural issue in one corner of the company and have a consultant or an inexperienced employee to build a solution for the problem, implement it and ask people who have never done something like that before to adhere to it – can be a lengthy and expensive process. 

Seasoned managers bring with them an arsenal of tools that they can implement as needed and test out to see if it works internally. If it does, it tends to spread.

Helps bring in behavioral norms around communication and conduct: The external leaders bring behavioral norms around communication and conduct by just modelling the way. They give feedback to more junior employees on how they’re interacting with others, which introduces accountability across, up and down the organization. 

Cultural changes help save time and money: The behaviors modelled by the leaders can spread across the organization via osmosis and similar to process and structure, it can take a lot of work on the part of the executives to implement this in the absence of the middle management layer. Such cultural changes around communication and conduct brought in by leaders help save a lot in terms of both money and time.

Cons of hiring from outside:

Tenured employees feel pushed aside/left behind: Some of your tenured employees who were hoping to get a managerial position but did not might end up feeling ignored or forgotten. This might leave you with some disappointed and disillusioned employees and also, result in a bit of turnover.

Explaining why some of the decisions are made, especially with respect to hiring from outside, can help deal with these problems. Transparency is key.

Poisonous leadership behaviors spread quickly: Similar to how positive leadership behaviors spread more organically with more seasoned managers coming in, poisonous leadership behaviors, if present, are going to spread just as quickly as the productive ones. 

A tech company I worked for in Boston had an area where they brought in a lot of external managers. There was an enormous amount of turnover until they were left with almost no one  in that particular division. A lot of that came down to poisonous leadership behaviors happening there. Founders are going to want to pay attention to what they’re seeing in terms of turnover and also stay in touch with people you know don’t fully delegate to that layer.

Look at your engagement surveys. Continue to talk to people and make sure that you have none of this happening.

Approaches to deal with conundrum of internal promotions versus external hiring

There are pros and cons to both of those sort of polarized approaches (internal versus external hiring). What I advocate for with organizations is a combination of those two things and I’ll go into a bit of why.

Combination of hiring and development: You can never develop too early for these leadership behaviors. You may want to approach instituting and developing leadership qualities from the angle of how much time we have spent on education and getting practical experience in our subject matter expertise compared to the former. 

Hiring is really effective and if you have the choice, I would advise you to hire more often at the director and above role where the stakes are higher and the leadership requirements are advanced. You can develop people to take on lower management roles, which will give them time to become more seasoned and advance their capabilities.

Bringing in folks externally at the director and above levels can help mentor managers. But if you have nothing in between (a combination of inexperienced and experienced leaders), it all falls to the executive team and to the founders. Sometimes, founders themselves are doing some of this for the first time.

Develop leaders before they are in formal management positions: Develop your leaders early – at level one – way before they take on their informal positions of management. It’s never too early to start developing some of these capabilities.

This worked very well at McChrystal Group where I worked a few years ago. It had a military culture where there was a lot of importance given to leadership and mentorship. Very junior employees were given leadership responsibilities, which were low stakes. They would run a part of a project and be fully responsible for it. They would begin to get some exposure and experience in public speaking and communication.

So, do this as soon as you possibly can – with all your existing employees and not just the high-potential ones. Even if an individual is not interested in management positions or maybe you think they do not have potential to be leaders because behaviors expected in leadership roles – collaboration, holding others accountable, the ability to provide feedback and the ability to model the culture – are something you want in everyone.

It helps founders to think about leadership development much before they start to feel the growing pains. You could start with how the next year’s board design looks, how would it look like the year after next if you’re doubling every year, how many managers would you need two years from now?

Are you set up to either hire, develop or do a combination of those to get to where you need to go? And often when you do that math, you know you’ll take a big gulp and realize that it’s never too early to get on top of this.

Formal Training: This is pretty much like your formal classroom training and most leaders think of getting external consultants to come in and train their employees. This type of training helps improve knowledge – employees would gain information but it’s not very good for practice. Even with simulations and mock sessions during the training, the practical experience is going to be pretty limited.

What one will take away from formal classroom training would be – “how do you do it”, which is important and must not be ignored. When you institute that training, choose core skills and repeat it every year. 

A media startup I had helped had taken a very ad-hoc approach to their leadership development. There are a lot of engaging speakers out there and if you’re reading a lot of leadership and business, there’s always a flavor of the month. The startup would get excited and bring in someone to talk about it.

That’s helpful but what you’re lacking with that approach is you don’t develop a common language between leaders. You get these different generations or cohorts of leaders that have slightly different tools, aren’t aware of what their common philosophy around leadership is and don’t have a common language.

Going back to your technical area of expertise, you have a common language and you can talk to experts about work using that. With leadership, there are so many different approaches and models that if you adopt an ad-hoc training method, you’re going to end up with different languages spoken within your organization. Try to come up with a comprehensive approach early.

In one financial institution I advised, the leaders had picked up different languages around leadership and they ended up having their own favorite models/jargons/terminologies, everybody interpreted it differently and people were working at cross-purposes.

Coaching, mentoring and shadow programs: Most managers learn how to manage by being thrown into that position and learning it on the ground. Founders and executives can do this better by focusing on coaching, mentoring and shadow programs.

Employees get to speak with their coaches about their work, about the people around and the environment in which they are operating. The coach’s role is to open up new perspectives and help them figure out what other opportunities the employees have so that they can go back and try something new.

Mentoring is pretty much similar but mostly internal where the employees are paired with more experienced individuals in the organization. The mentors usually talk about how they dealt with a particular problem or approached a particular situation where the employees decide which route they want to take and perhaps, do it in their own style.

What’s unique about both coaching and mentoring is that the employees are immersed in their natural habitats – they are encountering actual problems and it’s more complex. In a classroom environment, it’s more theoretical.

I don’t really see many organizations going for shadow programs. I instituted one such program at Binc with great success. For emerging managers and people that aspired to be managers, we set them up with a “Make your own adventure” kind of checklist for experiences that we thought were important for them to have before they were considered for management. 

Some instances under the program: to sit in on a one-on-one with a more experienced leader and then to lead a one-on-one with one of their project subordinates – not a direct subordinate, but someone that worked for them on a project, to speak at a team meeting, to lead a brief to a client so that they’re summarizing that rather than the team’s lead.

The list of experiences were listed and the number of times they had to go through these were also specified. The ask was: if emerging managers are observing, then they debrief with the leader that led and if they were leading, they debrief with the leader that observed. Going through such experiences provides practice in a very structured way.

We were very purposeful about building out this shadow program so that employees navigated through their own practice and experience. It didn’t require a lot of resources because it was self-led.

Internal hiring of leaders should behirin based on leadership capabilities (not just individual contributions): Individual contributions are really important and there is going to be an overlap between your needs for leadership and individual contribution. But, of course, your leadership needs go above and beyond that – they need a lot of interpersonal skills. 

If you’ve instituted a combination of the above – coaching, mentoring and shadow programs, you’re going to see the skills emerging and before your next promotion decision, you’ll know who is ready for it.

Perform a job analysis to understand what makes someone great in that role. The way I do that is interview people who have done that role really well and those above the role that know what they’re looking for in it. Based on these, I boil it down to a few critical criteria required to do the job well and train and select for those capabilities.

This approach is evergreen. While there’s a little work up front with this, they will last you. You may have to build another level above but those capabilities do tend to survive the test of time.

Dealing with an individual contributor critical to business but not management ready

What about that individual contributor who is business critical but not yet ready to manage? They either don’t have the skill or they don’t have the will. There are a lot of people that aren’t interested in management  but they do want to progress in their career. They want to continue learning. They want an upward trajectory. They want additional compensation.

One way to solve this is to have two career tracks. Typically, at the lower levels, everyone’s an individual contributor. Whether you’re going to end up being a manager or not, everyone’s sort of progressing along the same track. 

At a certain point, there are some folks that want to lead. With their next promotion, they head off on the management track and they’d be responsible for getting work done through others. That would come with a promotion and additional pay. 

While on a technical track, they would progress in their careers, get promoted and receive additional pay but they don’t manage a team. They would typically take on greater responsibility and there might be expectations from them to have a greater subject matter expertise, to speak publicly and maybe, become the organization’s public face for that particular expertise. 

They might be asked to codify some of what they’re doing to teach that subject matter to others. However, they are not really reviewing, dealing with employee relations issues or leading team meetings. This can be a great relief to people who just want to focus on something they love to do.

Generally, the technical track does cap out at a certain point after some level and sometimes, in terms of compensation as well. The reality is such for the technical track because leadership roles have such an outsized influence on the organization. Despite the cap, there are people who have had brilliant, rewarding careers and sometimes, I’ve seen some folks hopping from the technical track to leadership and vice versa.

This can be a really effective way to retain people that either aren’t ready or aren’t interested in leadership.

If you have any questions or thoughts on this particular common conundrum any startup founder might face, please do comment below. Or you could reach out to me on LinkedIn as well. Until then!