Building Your Management Team as Your Startup Scales Is a 'Make-or Buy' Decision…

Editor’s Note: In the new podcast Masters of Scale, LinkedIn co-founder and Greylock partner Reid Hoffman explores his philosophy on how to scale a business — and at Entrepreneur.com, entrepreneurs are responding with their own ideas and experiences on our hub. This week, we’re discussing Hoffman’s theory: to lead an organization to scale, you have to be as skilled at breaking plans as you are at making them. Listen to this week’s episode here.

Once a company has grown from small to midsize, the owner will have to delegate the hiring and management of workers as well as tactical decision-making responsibility.

Failure to delegate in this way may result in the business’s growth stalling because the owner has become overwhelmed. As we pointed out in our book, Let Go to Grow, continued growth actually requires delegation, but that move is unwise until the point at which the proper managers are in place. Otherwise, the business owner could be facing disaster.

Related: Sheryl Sandberg Shares What She Learned About Growing Teams for Facebook and Google

However, choosing management talent is different from hiring front-line workers. The reason is that the management role is more highly leveraged. The stakes are higher, and the cost of mistakes will be magnified. An individual worker can cause issues with everything he or she personally touches. But, a manager can cause an entire team to fail.

Make? Or buy?

The first decision you must address, then, when creating a management team is whether to promote existing employees into these positions or to bring in people in from outside. This is a “make-or-buy” decision, and it isn’t an easy one. If you decide to promote existing employees, you’ll need to develop their management skills. And here, it’s wise to remember that good managers aren’t born; they’re made. If you decide that you need to look outside of your organization for managers, you will need to determine how you are going to compete for talent.

Beware of the “Peter Principle.”

Part of the difficulty in promoting internal candidates is the Peter Principle. The Peter Principle holds that companies tend to promote employees until they ascend to a job that they’re not competent to perform. In other words, when an employee is performing well, a promotion follows; and this continues until that employee reaches a position he or she does not perform well.

The reason this happens is that the criteria for promotion in many companies is performance in the current job, not the expectation of strong performance in the job a level up.

Related: How to Identify Growth Potential During the Hiring Process

Oftentimes, employers promote their first employees into positions of greater responsibility, even if they don’t have the requisite skill set for success. Sometimes, the objective is to reward the loyalty of employees who have been with the company from the start. Other times, it is because these are the employees the company has and is reluctant to layer them under outside talent.

Don’t misunderstand: There are actually a number of benefits to promoting from within. It’s good for morale. It demonstrates to others that it is possible to advance within the company, which may aid retention. And, when promoted from within, new managers enter the role with an understanding of the company that no one from the outside could possess.

When existing employees become new managers, moreover, the company knows their strengths and weaknesses. By giving current employees their first opportunity to manage, the cost may be a bit lower than that of hiring experienced managers from outside the company, at least initially. We ourselves have a bias for promoting from within. However, we also have a bias against setting up people to fail.

Three questions to ask 

Consequently, when filling management positions, a company should ask three questions.

• Do we have anyone internally who currently has the necessary skill set to succeed?
• If no, do we have anyone who could develop the requisite skill set with appropriate investment?
• Could this person develop the skill set within a timeframe that would make it reasonable to promote him or her now?

If the answers to these questions do not yield a good internal candidate, you should look outside the organization for management talent.

If you want to promote from within, you need a group of people with the appropriate skill set waiting in the wings. This won’t happen by accident. It requires hiring junior people who have the intellectual horsepower and the behaviors that you want in a manager. You will then need to develop and mentor these people so that they will be ready for the challenge of being a manager when the opportunity presents itself.

Related: Who Do You Trust to Hire Your Next Top Employee?

Providing opportunities

To do this, provide development opportunities ahead of promotion into a management role. This may take the form of allowing the potential manager to lead a task force or other project. For example, one of our clients identified a young woman who she believed had the potential to be an excellent manager. To help this high-potential employee gain experience, the company had her lead a team of several people. Further, the company hired an executive coach to help the young woman develop the skills she would need to succeed in her role.

A company that wants to promote from within should also develop proactive plans to retain these employees. You can’t afford to lose those whom you have groomed for senior roles. We find that high-potential employees want learning opportunities. They need to feel that they are growing in knowledge, skills and experience.

To provide this growth, give these employees challenging projects to tackle; then spend time mentoring them to help ensure success. When it’s appropriate, let them attend conferences, seminars and classes. In the end, timing is important. When an employee is ready for more responsibility, you need to find him or her an opportunity fairly quickly.

Deciding to go outside of your organization to recruit talent, meanwhile, can be a tough call. This is especially so when the people who helped the company mature from its infancy no longer have the skill set or talent to lead, or sometimes even to work in the business as it grows and changes.

Related: How This CEO Learned to Set His Ego Aside and Let Employees Do Their Jobs

Letting go

In our experience, the hardest part of letting go for most owners has to do with their people. It is relatively easy to let go of processes that no longer help the business,or tasks that are no longer appropriate and that you need to eliminate or delegate. But to let go of people requires of the company leaders a special will and determination to grow and survive. This is particularly true since most entrepreneurs who successfully start and grow businesses care deeply about their people.

If some or all of your current employees cannot take your business to the next level, you will need to be honest with them. In our experience, having a conversation with each employee about the needs of the growing business and how you see his/her future role is essential to keeping employee expectations in line with reality.

Tell these employees early on that, as the business scales, you expect to bring in some heavy-hitters. Let them know that this means they may be layered. These are not easy conversations, but absolutely necessary if you want to treat people fairly.

Again, what this all comes down to is a make-versus-buy decision. Would it be expedient for you to grow the people you have into new roles as your business expands and changes? Or will you have to look outside the organization for the skills, talent and experience needed to take your organization to the next level?

How does one decide, especially when there is a heartfelt attachment to an existing employee and perhaps a family or friend connection involved? Can you remove the emotional roadblocks and look at the situation pragmatically? In fact, you may have to: To successfully grow, the owner will have to let go. And sometimes that means letting go of good people who simply cannot grow with the organization.