Effective Strategies for Expatriate Cost Management
We all know that expats are expensive and that a significant proportion of assignments fail – but what can be done to manage costs and to maximise the overall return on investment? And in these straitened economic times, we all know that expatriate costs are increasingly under the microscope. Hopefully, this report will provide some useful insights and guidance for anyone struggling with the thorny issue of expatriate cost management.
As my contribution to the debate, I set out 21 simple ideas for effective Expatriate Cost Management. All of these ideas have been adopted by companies and are proven to work in practice but, as far as I am aware, no one company has adopted every single one of them. So, take a look down the list – some of the ideas will be familiar and you may well be using them already. Others however will appear radical – but do give them due consideration as they are all workable suggestions.
1. Prioritise. Too many companies try to cut expatriate costs by reducing headcount in the International HR department or by forcing vendors into unsustainable price reductions. The reality however is that it is not internal headcount or vendor fees that make assignees expensive. In fact research undertaken by the Forum for Expatriate Management suggests that in-house costs typically amount to just 1-2%of total assignment costs and external costs amount to no more than 8-10%. The big costs are Assignment Allowances (35%), Property Costs (35%) and Relocation Costs (15%). So if you are looking to control expatriate costs, concentrate on the big ticket items – don’t rush to slash headcount.
2. The easiest way to control overall Expatriate Costs is to have less of them in the first place. So undertake a rigorous review of who is an expat. Introduce new or revised policies for the selection of assignees and internal governance procedures. For example, insist that cost estimates are always undertaken and that the line is fully aware of the cost of every candidate for the assignment.
3. While on the subject of candidates, never ever let the potential assignee know that he is the only candidate. If you do, you will have surrendered all the negotiating chips and assignment costs will skyrocket.
4. Not all assignees need to be on a traditional expat package. Consider using Local Plus or Expat Lite packages. Look at commuter assignments, local hires and, most importantly, review your localisation policy. All too often corporates are loathe to change their assignment policies because of the adverse impact on existing assignees. The simple solution is to grandfather existing assignees .
5. If you want to be truly radical, move to a “Flexpat” policy. The concept is broadly similar to Flexible Benefits – assignees are given an overall value for their Flex Allowance, which would cover all the normal allowances such as rent, home travel, disturbance, removals etc and it is then up to the assignee to determine how the allowance is spent and how much to take in cash. True, Flexpat is often far less tax efficient than, say, rental allowances, but with a modest overall cap on the Flexpat allowance costs can be controlled far more rigorously.
6. Deductibles. It never ceases to amaze me how some companies almost always use deductibles and others shy away from them completely. In my view, deductibles are one of the simplest and most transparent means on controlling assignment costs. The aim of the deductible is to reduce allowances to compensate for the fact that the assignees is saving money – eg a housing deductible where an employee is expected to rent out his home location property, a schooling deductible where children are in private education etc. If you don’t use deductibles for property or education then this is an easy way to mitigate costs.
7. Manage your Relocation Agent. You can do this through both incentive deals and penalty clauses but the message you need to get across is that the aim is not to find the assignee the home of his dreams but to find him an appropriate home that is within the allocated budget. All too often, relocation agents show properties to assignees that are outside their rental allowances. That in turn raises assignee expectations and encourages them to renegotiate their allowance. I know this may upset some in the industry, but if I was a client I would put a penalty clause in the contract if the relocation agent shows any property that is outside budget without prior approval from HR.
8. Conversely, you can gain share with the relocation agent by offering a bonus to the extent a property is selected that is below budgetary limits.
9. This may be considered too radical by some but try gain sharing with the assignee. Most companies I deal with will openly admit that almost all assignees spend every penny of their rental allowance. However, one leading FMCG company recently told an FEM company that 80% of their assignees select accommodation that is substantially within budget. What is this household name company doing right that so many others are doing wrong? The answer is Gainsharing with the assignee. Under their housing policy, the assignee gets to keep 50%of any unspent rental allowance. Not surprisingly, this changes the whole dynamic of the rental decision and encourages assignees to select more modest accommodation and pocket some of the savings. This is truly a simple win-win and the Gainshare concept can be equally adapted to deal with any other allowance, such as education or home travel.
10. Look carefully at your mix of hotels, serviced accommodation and long term rentals. The traditional approach of using hotels for short term and initial visits followed by individually selected long term rentals for each assignee can be extremely cost inefficient – especially if you always have a certain minimum number of assignees in any one locations. By contrast, some of the major management consultancies (who move substantial numbers of employees) tend to “bulk-rent” a selection of properties in their major locations. These properties can then be fitted out and used by the assignees when they first arrive. Such solutions can be significantly cheaper than hotels or even serviced accommodation and provided you set the number of properties well below the likely level of demand you are unlikely to ever have major void period. The balance of your property needs can be met by hotelling or using serviced accommodation in the normal way.
11. Another key area where cost savings can be achieved is Removals/Shipping. The secret here is to plan in advance. Don’t ship goods at the last minute (prices will be high) and certainly try to avoid the school holidays.
12. You may even find it is cheaper to rent furniture in the host location for a short period of time.
13. Incentivise your removals/shipping company to investigate “shared loads” (i.e. sharing a container) or “Back Loads” (i.e. return trips). Substantial savings can be made but you are most likely to find them if you incentivise your vendor.
14. You should also incentivise the assignee to leave more stuff in storage back home by enforcing rigorous volume limits.
15. One cost that can be substantial but is often hidden is the cost of currency exchange and rate volatility. Most offshore bank accounts are designed for the retail market and often better deals can be achieved by liaising with specialist foreign exchange dealers. This is an area where it pays to shop around and to explore innovative strategies to hedge foreign exchange liabilities.
16. In-house – v – Outsourcing. This is an area where the jury is still out. Some companies are strong supporters of outsourcing while others have tried it and regretted every moment. One thing is for certain, you cannot outsource responsibility so if you are going to outsource you should do so with your eyes wide open. That having been said, it is certainly worth talking to leading outsource providers as there will almost certainly be a point on the spectrum from fully outsourced to fully insourced that best works for your organization.
17. Outsource enforcement. Although you cannot outsource responsibility you can outsource enforcement (even if only to an internal shared services centre). If your policy is rigid then “Computer says No” can be an effective first barrier to assignees who may be trying their luck with your already generous allowance package.
18. Don’t separate costs into multiple budgets. The more allowances you have the more budgets and cost centres you use, the higher your overall costs will be. My advice is to limit the number of allowances to as few as possible and to keep all costs within a single cost centre. Lose control of the accounting and you lose control of your costs. The only winner will be the assignee – who is frequently extremely adept in maximising his allowances!
Hopefully these 18 suggestions have provided some food for thought as you manage your expatriate costs. The last three suggestions are more generic in nature butpossibly even more mission critical.
19. Have a policy and stick to it. In many cases the excessive costs of expatriate programmes come as much from the exceptions as from the policies. Make sure your policy is rigorous and well documented. Make sure the line understands the policy and that it is enforced from the top down. If you have board members who are assignees, make sure that they understand the importance of leading by example. With them on your side, controlling cost is a piece of cake !
20. Focus on the family not just the assignee. We all know that a significant percentage of all expatriate assignments fail. The reasons for assignment failure are multiple but in many cases it is because lack of attention has been paid to the assignee’s family. The employee often has a well grounded support function at work. The trailing spouse is all to often left to fend on their own. A good spousal support program can have minimal cost (for example, many companies use other expat spouses as volunteers) but the costs of failure can be significant for the host location.
21. Lastly and most importantly, talk to your service providers. Best practice is to treat service providers as partner not vendors. At the end of the day, there is a common client (namely the assignee) and the common goal is to manage the assignment programme as efficiently and effectively as possible. Try to build gainshare arrangements with your service providers.
Establish realistic Service Level Agreements and above all communicate, communicate, communicate. Neither corporates not service providers are telepathic – on-going frequent communications (both formal and informal) are the best (and possibly only)way to achieve a long-term relationship that works for employer, assignee and service provider.
By Brian Friedman, Founder,
The Forum for Expatriate Management
Taken from The Forum for Expatriate Management’s report ‘Effective Strategies for Managing Expatriate Costs.’
Read the latest report ‘Managing Expatriate Reward’ here.
To contribute or advertise in future FEM reports contact Steve Ashton on +33 (0) 963 532 063 or by email steve@totallyexpat.com .
