No returns: localizing expats saves companies big money and can be a smooth transition with a little due diligence by HR - Global HR Management

HR Magazine, Nov, 2002 by Carla Joinson

Companies have long accepted the high cost of expatriate assignments as the price of doing business in the global arena. But there's a way companies can minimize this cost, although they seldom use it or don't use it effectively. When expatriate assignments start to linger or change in purpose, HR can "localize" expatriates and reap substantial savings without compromising the assignment or hindering the assignee.

The localization process migrates employees away from their U.S. expatriate packages and into the host country economy, usually by eliminating some of the expats' allowances immediately and phasing out others.

There are many issues involved with localizing expatriates, from reconciling pension plans to addressing health care concerns to preparing expats for unfamiliar host country tax laws. However, according to New York-based Organization Resources Counselors Inc.'s (ORC) 1998 Worldwide Survey on Localization Policies & Practices for Expatriates, the latest survey available, only a quarter of participants had a formal localization policy. Syd Robertson, ORC's executive vice president, says, based on his experience, this figure has not improved over the years. He stresses that it's important for HR to "plan upfront and think through possibilities" so the process can go smoothly for both the company and the employee.

It can be well worth the effort: Expatriate assignments cost an average of $1 million over a three-year period, and converting an expat package to a local one can save the company hundreds of thousands of dollars. HR professionals say the money saved more than compensates for headaches that may arise during the transition.

With an understanding of what's involved with localizing expatriates, HR can keep employees satisfied while adding to the company's bottom line.

Know When to Localize

Robertson says companies that consider localization upfront have better success during the transition period. "In assignment letters, companies spell out the provisions for localization," he says. "When they send someone out to develop a business, for instance, they tell the employee upfront 'if the business flourishes, we'd like you to run it and we'll localize you."' In addition to having a goal set for the company, it allows expatriates to go into assignments with clear expectations.

Mary Rowe, director of Motorola's global assignment center in Schaumburg, Ill., says her company has three categories of expatriate assignments, which simplifies the decision on when to localize. "Our international transferees understand from the start that the job is located in another country, and they will be treated as a local hire with host-location salary structure." Rowe says the company is increasingly using this category.

"Less frequently, we have 'wind-downs,' where an employee has been on an assignment for five to six years, and we approach him or her to be a local hire. Because the person is used to expat benefits, we wind down these benefits over a period of time."

Rowe says a third scenario occurs when an expat has been on assignment for a shorter period of time, but the company sees that the position itself has moved to the host country and is no longer an expat assignment. "We treat this situation as though the position had been a local hire from the beginning and immediately convert benefits," she says. "We will ask the employee to convert to local status. We do offer to bring the employee back [if they choose not to localize], but we don't offer repatriation--there is no job hack home."

Sometimes you can't plan for localization, and the question arises as the assignment evolves or when HR reviews the length of existing expat assignments. A typical cutoff point has been three to five years, but that timeframe is shrinking.

ON Semiconductor in Phoenix reviews assignments after 12 to 18 months because "expat assignments are so costly," says Jennifer LaCroix, the company's HR director. "We look at the original purpose of the global assignment and the length of time the employee has been on one," she says.

The company immediately rules out two assignment types when deciding whether to localize: "We don't typically localize for a technology transfer, when employees are sent for a year or two," LaCroix explains. "And some assignments are development-related."

Sometimes an employee who doesn't want the assignment to end drives the decision to localize. "The employee may have a good opportunity in the host country that the U.S. [office] can't match, or maybe the person has married or has family in the area," explains Maurizio Cascapera, manager of international human resources at Nestle U.S.A. Inc. in Glendale, Calif. "Maybe they've just fallen in love with the country."

In some cases, though, localization isn't a good option. Environments can be so unattractive that employees will walk away from the assignment rather than be localized. "A guideline for HR might be to look at places where independent data providers like ORC, Runzheimer International, ECA International, etc., include a hardship allowance--these locations are not good candidates for localization," says Ken Wade, Deloitte & Touche's international assignment services tax practice leader in Chicago.