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In our company when we have an internal applicant, we advise the candidate to speak to their manager about their application and we also advise them that the hiring manager will be advising their current manager of their application as a courtesy. This allows us to plan for transfers and reduces the idea that someone is getting "stolen" from a certain department, or that anything is being "hidden" from a manager. As a result, these types of situations are spoken about fairly openly and honestly, and I haven't seen any lashback as of yet for anyone who has wanted to move around in our company. I'd rather have them stay here than leave us altogether. :-)
Of course, this is more often than not a recipe for disaster, but you should sensitive to any possible desires on the part of the interview/management team for "fresh perspectives." If you think this is a possibility, address it in the interview. Talk about some changes you feel you could implement and the value that the improvements will add.
In taking this tack, be careful not to trash others who came before you and may have put in place the very procedures you want to do away with. Talk about your propositions professionally, and that way your insider status will be come across as a benefit AND as a road to fresh thinking.
Early on in the interview, I personally would acknowledge the potential awkwardness of the interview situation, given that you have relationships with the interviewing team now and in the future, whether you get the promotion or not. But I would just do it in passing, not like it's a big deal or anything - just like something that's in the air, that everyone must be thinking about.