Monday, May 22, 2006

Hiring in high-tech firm: Build Vs Buying Talent

High tech startups have a different set of hiring needs. During the in the initial years (1-2 yrs) the founders, who usually have substantial experience, recruit only experienced people. Hiring experienced people in the initial days of a startup is beneficial as the organization quickly gets people who have the skills it needs. As the organization matures, companies will develop the necessary skills in-house. These two options represent the Buy strategy & Build strategy respectively.

The choice between the two strategies is not clear - the company must answer the question: "Is a company better off developing and training specialized workers in-house (build) or hiring skilled workers from outside the company(buy)?"

This question becomes a bigger challenge in a latter stage startup or newly public (IPO) company, and at medium size firms. In a fast paced high tech industry, this problem becomes even more acute as the pace of technology changes is very rapid, companies cannot afford to lose time in training existing employees in new technology areas. But the company cannot hire the required talent from external world either as very few people possess such talent. The inability of the company to hire the required talent and the threat of a rapidly closing market window puts the company in a dire dilemma.

In this blog, I am documenting my observations and my opinion on acquiring the required talent.

When to "Buy" talent

In a fast paced industry where business environment is changing quicker than the time it takes to train & build the required talent - then companies are more likely to buy the required talent. In such industries - such as Semiconductors, software, Bio-sciences etc., it pays to buy the skills instead of developing them. This is more beneficial for senior roles such as system architects, senior design engineers, project managers etc.

For example, in graphic chip industry, companies such as NVIDIA, Intel, ATI & VIA - have hired talent from each other. In graphic chips market, new products are introduced every 12-18 months and companies do not have the time to groom their lead engineers. So they end up proaching from other companies.

Buy strategy has its advantages - ability to develop new products/technology quickly with fewer mistakes. But it also has a few serious shortcomings - Risk of not being able to find the right talent at the right time, risk of antagonizing existing employees that results in attrition, and increasing the operating costs. (Hiring external talent costs more money - cost of salary, cost of hiring, time & efforts for hiring)

When to "Build" talent

In a mature industry, where business changes are more predictable - companies find it valuable to build the required talent. For example in IT services firms, or Automobile firms, companies tend to hire college graduates and train them in various disciplines. Building talent in-house is often cheaper and it saves labor costs when compared to "buy" option. Therefore mature/established companies prefer to build talent whenever possible.

Companies which implement "build strategy" often hire a lot of fresh college graduates, have an extensive training program, make/encourage employees to have a career plan and have a mentor program for all employees. Intel, IBM, Cisco, Qualcomm, Dell, GM, Ford etc., are some of the strong advocates of "build strategy".

A mix of Buy & Build strategy

In a fast paced business environment, developing a new product requires a mix of engineers dominated with people who have new skills required for the new technology and also a group of engineers who are well experienced in the previous generation of technology. Such a group cannot be put in place by "Buy Talent" or "Build Talent" strategy alone. The problem becomes even more accute when if that group is often dominated by people who have the new skills and expertise in new technology.

This requires a mix of "buy-build talent" strategy. This strategy creates unique set of advantages by providing a lower cost and also helps in retaining existing talent. Existing employees are more likely to be paid lower than the new & experienced recruits and existing employees can be easily retained by offering training programs in new technologies and new skills. Retaining existing talent will involve providing in-house & external training, motivating them with the attraction of working on latest technologies and charting a career growth path.

To successfully implement this Buy-Build strategy, companies need to make two important decisions:

  • Whom ( or which positions) to hire from outside? And at what costs?

  • Who among the existing employees should be retained & trained in new technologies & skills?

Implementing this "Buy-Build" strategy involves building an effective HRM system based on:

  • Cost of hiring experienced & skilled talent
  • Time-to-market window & also modeling the cost of missed opportunity
  • Risk of not being able to hire the required talent in the open market.
  • Cost of training existing/current employees
  • Risk of losing existing employees
  • Underlying cost structure needed to make the project successful

The risk factors must be weighed and factored into the cost model. The optimal mix of buy-build talent is then dependent on a series of financial analysis - NPV or IRR analysis. The overall cost of talent has to be taken into consideration for project planning. Once the requisite mix of "buy-build" talent is identified, HRM policies must be targeted towards hiring the requisite talent from the market and retaining, training & motivating the existing talent (which is required for the project).

Closing Thoughts

With rapid changes in market conditions, companies are changing their HRM policies towards a mix of "buy-build" talent. Even established companies such as HP, IBM, Microsoft etc., now have a mixed talent pool at all levels of organization. Companies no longer have the option of "buy" or "build" alone. Only startups can sustain a pure "buy talent" strategy - but as the organization matures, HRM policies will have to be changed to accommodate a "buy-build talent" strategy.


Natti said...

I would favor the build strategy any day. But in India where the attrition rates are very high, the company spends significant amount of time building the talent only to lose the candidate after they have gained experience. How do you think this can be avoided. I feel this is where the buy strategy comes into play, i.e. the company offers more incentives to retain the talent. However, this increases the cost to company. Where is the balance then?

Arun Kottolli said...


It was a valid point you made. Attrition rates are being very high in India today. But historically, India has enjoyed the lowest attrition rates. Thus public sector and other industries have preferred to build the talent in house. Avoiding attrition requires a concentrated efforts by the firm. One of the main reasons for attrition in a firm is that firms prefer to buy talent. Buying talent from outside – makes existing employees demotivated, often times the external candidate commands a higher salary than the loyal employee and the external candidate gets a better job title/post. All this demotivates loyal employees and forces them to look at other opportunity outside the current firm.

Firms which enjoy low attrition rates are the ones who do not hire from outside or those who use “build” strategy. For example look at Bosh or MICO in Bangalore. Robert Bosh group – which is into developing embedded software for automobiles enjoys very low attrition rates, it is virtually 0% for people with more than 3 years of experience. In return, company hires all managers internally, the company has a well defined training program and employee career development plan.

In conclusion, buying talent from outside the firm is one of the biggest reasons for attrition.

Determining the Cost to company is quite a complex affair. For example, look at our firm. Today we are hiring RF test engineers who can work on developing test plans for RF chip from Chip-Idea. We have 2 choices – hire internally, i.e., train one of the engineers or hire from outside. Let us examine both the options.

1. Hire Internally

Training an engineer in RF test procedure is virtually impossible for our company. We have no mentors who are experienced in RF. We have no RF testers, we have no RF labs, there are no RF training institutes in India. There are good universities in Bay area which have RF design courses – but even they do not teach RF testing. That leaves a few risky options: Send an engineer for training in RF design at one of the universities – and hope that he learns of RF testing also. Send an engineer to a test house – such as ITH etc under an agreement that they will train our engineer – but the question is “why should they train our engineer?”

So in a nutshell Internal Hiring is not possible. So the question of cost does not come. Even if we can get an engineer trained – then the cost components are: Cost of training, Loss of productivity in existing job, Risk of making a mistake on a project, risk of losing a customer.

2. Hire Externally

Hiring a trained engineer from another company is an easy option. The risks of making a mistake & losing a customer are low. However there are additional costs involved: High salary for this valuable resource, time to hire, and hiring costs (interview, recruiter fees etc). In addition, hiring an external person can create a few risk factors: Antogonising existing employees, the new employee may not be a good fit, increased attrition among existing employees, risk of this newly hired talent leaving the company.

For Open-Silicon, option of training or build strategy does not exist. Bit for Intel, Freescale, TI etc, can train existing employees in new skills such as RF testing, package design etc. Thus they can execute a “build strategy” .

Hope this explains.

Roman Rytov said...

Interesting topic. Always exists and always relevant. But if you go for building your talent how to do it and whom do you not want to try? I wrote on the topic in my blog: