Evaluating Returns on Expatriates

For companies that want to grow on a global scale and gain experience in the international business arena, expatriate assignments are a necessary investment in a long-term strategic goal.

But those investments are expensive. International assignments cost three to five times an assignee’s host-country salary per year—more if currency exchange rates become unfavorable. Even when expatriate programs are considered invaluable, experts say companies should attempt to capture the return they’re getting on those costly investments.

The obstacle is that tracking costs can be cumbersome, and calculating returns can be imprecise. Perhaps that’s why only 14 percent of 146 human resource managers surveyed by Cendant Mobility in April 2004 indicated that their company measures the return on investment (ROI) of expatriate assignments. And a quarter of respondents whose company did measure ROI admitted that they didn’t know how those returns were calculated.

“There is great variation on what it means to measure the ROI of international assignments and on what formula to use,” says Elisabeth Johnson, director of consulting services at Cendant Mobility in Danbury, Conn. “In all likelihood, there is not a silver-bullet formula. That doesn’t mean that ROI measurements cannot be performed.”

Indeed, companies such as Cognos Inc., a business intelligence software provider based in Ottawa, Canada, with 3,000 employees around the world, are trying to capture these returns. Cognos places about 30 of 300 eligible employees (director level and above) on a mix of short-term (three to nine months) and long-term (three to four years) expatriate assignments.

“In the long run we know we’re getting value,” says Rod Brandvold, the company’s vice president of organizational development. “But we don’t have a scientific way to say that an assignment has given us X amount of value or that the expatriate exhibited X degrees of improvement.”

Not yet, anyway. Cognos and a handful of other companies are closing in on ROI calculations. They’re doing it by keeping closer tabs on costs, clearly defining the assignment objectives, and strengthening selection and repatriation processes.

Benefits – Costs = ROI

In basic terms, ROI equals what’s left over after the costs of an asset or project have been subtracted from the benefits that the asset or project delivers.

Thus, the first step in quantifying expatriate ROI is to formally track costs—a step some companies have yet to take. “If more companies at least tracked the costs of expatriate programs, they would move toward a more accurate understanding of ROI,” says DeAun Green, a Chicago-based Watson Wyatt Worldwide international consultant.

But calculating expatriate costs can be tricky. The costs of international assignments can vary dramatically and can be complex to determine.

The largest expatriate costs include overall remuneration, housing, cost-of-living allowances (which sometimes includes private schooling costs for children) and physical relocation (the movement to the host country of the employee, the employee’s possessions and, oftentimes, the employee’s family).

“The moving of household goods can easily cost $40,000,” notes Noel Kreicker, president of IOR Global Services in Chicago and a member of the Society for Human Resource Management’s Global Panel of subject matter specialists. “If you move the piano, the horse or the wine collection, that’s an additional $10,000.”

And wide variations exist in housing expenses. For example, housing costs are absurd in Tokyo and London, while Australia’s housing costs are moderate.

Another significant cost of expatriate assignments involves smoothing out differences in pay and benefits between one country and another. Such costs can be both steep and variable.

Cost differences vary based on factors such as exchange rates (which can be quite volatile) and international tax concerns (which can be extremely complex).

Currency fluctuations can make the cost equalization—a formula designed to ensure that expatriates in different countries receive about the same salary and living expenses—more of an art than a science.

Tax issues are thorny, linger for a long time and require guidance from accounting and legal firms. They also vary by country: Saudi Arabia does not levy income tax, whereas Germany’s income tax is relatively high.

Tax issues are further complicated by the fact that U.S.-based expatriates are taxed in both their home and host countries on most assignments, so companies reimburse them for the additional tax burden. That reimbursement is also considered taxable income—sometimes in both the host and home country. The amount and due date of expatriate-related taxes vary based on a host of factors, including the timing of payments and stipends, international treaties, and country-specific tax regulations. Decoding these factors is so complex that HR professionals inevitably need help from accountants and tax lawyers to get the job done.

To deal with tax equalization and other cost-of-living adjustments, savvy HR executives set country-specific housing and cost-of-living allowances based on the latest benchmarks and currency exchange rates. They also refresh their calculations with new data at regular intervals—at least annually, often quarterly and sometimes monthly.

Don’t Stop with Costs

Mobility experts emphasize that tracking and managing costs is only part of the process. “To some extent, it’s assumed that cost minimization means value optimization,” says Michael Elia, managing director of TraQs Consulting, a London-based international HR firm. “That’s not necessarily the case. You can shave the cost of a program to such an extent that you undermine the value you’re able to get back.”

And that leads to the second ROI challenge: calculating the “R.” It is possible to quantify the value of fixing a production line in Puerto Rico or of implementing an enterprise software application in Asia. Yet, the challenge of quantifying the value of providing future executives with cross-cultural perspectives and international leadership experience can scare the visor off the most precise accountant.

To begin calculating returns, start with the potential objectives. “You can have a very cost-efficient international assignment that fails to meet any of its objectives and costs the company much more in the long run,” Johnson notes.

One set of factors HR professionals can consider are those developed by the Expatriate Technology Forum (ETF), an association of multinational companies such as Shell, Philips and Heineken, created to develop benchmarks, metrics and standards related to expatriate ROI. The ETF’s “assignment value model” describes six drivers of international assignments:

• Technical skill need. BASF Corp., for example, sent experts from Germany and Belgium to Port Arthur, Texas, to help construct the world’s largest steam cracker.

• Knowledge transfer. When internal surveys revealed that Cognos’ Japanese employees were dissatisfied with their pay scale and benefits, the software firm dispatched a Japanese-speaking HR manager from its Ottawa headquarters to go to Japan to strengthen the HR infrastructure there.

• Management development. Leadership development is the most commonly cited driver for expatriate assignments. BASF Corp. expatriates, who are primarily executive candidates developing “intercultural competence,” represent 1 percent of the company’s 100,000-employee workforce at any given time. “We find that the intercultural experience of a foreign assignment is invaluable as you become more and more involved in the day-to-day business of BASF,” says Norman Maas, who credits his 1996-97 assignment at BASF’s global headquarters in Germany with aiding his rise to senior vice president of HR for North America.

  The key, says Maas, is to assign expatriates real jobs. “Don’t send people overseas just to get a checkmark on their resumes.”

• Renewal. This category, referring to the renewal of talent management, addresses organizational development objectives by assigning international management development assignments to high-potential employees early in their careers. Traditional management-development expatriate assignments tend to target high-potential employees who have logged at least five years with the company and have progressed to at least the director level.

  Zurich North America, for example, has traditionally dipped high-potential new hires into several different functions and business lines during an 18- to 24-month rotational program. This year, the insurer is expanding that program to include international assignments.

• Governance and control. This driver refers to the art of disseminating the cultural mind-set within corporate head- quarters to far-flung offices and operations.

• Organizational need. A change in organizational structure, such as a merger or the creation of a shared services center, often necessitates help from abroad.

Elia, who played a major role in identifying those drivers with ETF members, says the model “allows an organization to describe and compare individual assignments according to what the value is to the different stakeholders, and measure a kind of relative value proposition which can be set up and compared to costs.”

Once an organization determines the key drivers of its expatriate program, HR can begin to define objectives and assess return. And that can be useful in guiding employees and in making decisions about the costs they incur as expatriates.

“One of the most conflicted people I’ve ever encountered was a first-time expat from a small company—a finance guy with four school-aged children,” notes Mary Ellen Myhr, a consultant with Associates for International Research Inc., an HR and global mobility consulting firm in Cambridge, Mass. “It cost the company $80,000 a year just to educate his children.”

The high cost of his assignment caused the finance executive to regularly call his company’s president to make sure he felt the assignment was worth the expense. “The president would constantly reassure him, ‘Yes, you’re worth it, you’re worth it,’ ” Myhr adds.

Completing the Equation

Different objectives require different levels and lengths of tracking. Leadership development involves a much longer-term value proposition and should include a thorough repatriation plan. By contrast, the ROI of an international assignment that plugs a skills gap, however, is not negatively affected if the expatriate bolts after successfully completing the engagement.

Given the generally unsophisticated state of most expatriate value measurements, the most realistic outcome of initial ROI calculations is better decisions based on more accurate information. Jane Malecki, vice president of assignment management at Weichert Relocation Resources in Boston, notes that intangible objectives can be tracked through scorecards.

If leadership development is the objective of sending a manager to Turkey to run a factory, the scorecard categories might include retention of factory employees, production volumes and dates, revenue and profit, and inventory turns. Ratings of one through five can be assigned to each of the, say, 20 scorecard categories a company tracks.

“You would then establish different levels of performance,” Malecki suggests. “A cumulative score of 75 and above is excellent.” But that “excellent” rating only has value if it is considered alongside costs. “The expatriate may be achieving a perfect score, but the assignment, which was budgeted to cost $4 million, is now projected to cost $10 million because the assignee’s spouse did not adjust to the country and flies home every week,” Malecki explains. “You can’t break the bank.”

Moving Beyond Point A to Point B

To date, however, most HR managers in charge of expatriate programs have focused much more on the tactics and logistics of moving expatriates from point A to point B, notes Cendant Mobility’s Johnson. That needs to change if accurate ROI evaluations of international assignments are to be made and utilized.

“HR mobility people need to have influence outside of the HR department,” Johnson says. “They need to huddle with corporate and operational executives to look at the macro value of the international assignments and to ask if and how that value fits with the company’s global strategy.”

Some HR executives, like BASF’s Maas, can personally vouch for the value of international assignments.

“The department in which I worked in Germany is the department I work with now,” Maas notes. “My boss in Germany then is one of my bosses today. From that standpoint, my assignment has been tremendously successful because my boss understands me, I understand him, and we have a relationship where we talk on the phone and things get done. The fact that I spent 18 months there is the reason that our relationship is so fruitful.”

Eric Krell is a business writer based in Austin, Texas, who covers HR and finance issues.

Web Extras

• How Currency Fluctuations Squeeze Returns
• Expatriate ROI: More Resources