Want to build or buy human capital?

Recruit on campus or hire from competitors? In other words, build human capital or buy it? According to Professor Amit Chauradia, an expert in the strategy area at the Indian School of Business, most companies choose from the two options when it comes to hiring employees. While both building and buying strategies can generate value( over different time frames ), it is more crucial to understand “how” building versus buying generates greater economic and financial benefits for the firm.

Ch aura di a’ s research highlights four classic human resource problems that companies must effectively address to increase their returns from the HR strategy. First, firms face challenges in accurately assessing an employee’ s quality attributes prior to hiring. Second, they find it difficult to motivate employees to invest time and effort in company-development efforts when employees are keen to enhance their own development and skills that aren’ t company-specific. Third, determining the fine balance between the employees’ goals and the company’ s goals is more challenging that one can imagine. Fourth, how can companies get the incentives right to motivate employees to work diligently?

Ch aura di a points out that the key to solving these problems lies in a company’ s ability to leverage reputation, promotion chances, and hiring of external leadership. Using data of over 200 firms from a human capital-intensive industry, he demonstrates that companies with a strong reputation and good promotion chances for employees can benefit the most with a building strategy, while those that hire external leaders from rival companies will benefit the most with buying strategies. A company that uses a building strategy will invest significantly in training, mentor ship and job rotation. The difficulty lies in hiring the “right” type of novices who have the desirable skill sets. Chauradia suggests a company’ s reputation and promotion chances will attract and help in retaining the most talented rookies.