Thinning the Ranks of the Career Expats

October 1, 2004

Over the last several years, as Agilent Technologies cut 16,000 jobs during a major restructuring, it was obvious that its multimillion-dollar expatriate program needed serious trimming. But the company faced a problem: It didn’t know what it was spending on its employees in foreign countries. The company, the world’s largest maker of scientific-testing equipment--from fiber optics to semiconductor products--did know that in general, the cost of an expatriate is three times the expat’s annual salary for every year of the assignment--easily putting the price tag for some three-year assignments at $1 million. But with spending spread across 21 different countries, such as Germany, Singapore and China, and across business areas, from compensation to taxation, it was nearly impossible to nail down the total cost of relocation. "If you don’t know how much you’re spending, how do you get started on how to save?" says Lin Contino, global relocation manager at Agilent, which is located in Palo Alto, California, and now has 28,000 employees. "We couldn’t get a grip on it. We had 422 different suppliers globally that provided relocation services. I could tell the cost for the United States, but I couldn’t tell for other countries. I couldn’t pull it all together."

    To get a better handle on spending and to standardize policies for expatriates, Agilent outsourced its expatriate program in 2001 to Cendant Mobility, a relocation services firm in Danbury, Connecticut. Agilent determined that in 2000, its international transfer program, with about 1,000 expats, had cost approximately $72 million. Over the next three years, the company sent fewer workers overseas. It now has 300 expats; it is filling positions locally instead of deploying U.S. employees abroad and has scaled back on benefits packages for expats. The company has slashed relocation costs by 70 percent, to $23 million.

    A sluggish economy and a weak U.S. dollar have led more and more organizations to tackle the exorbitant cost of their expatriate programs. But it’s not easy. Many corporations are hard-pressed to put a number on the total cost of their international programs or even on how many employees they have overseas at any one time. It’s not uncommon for organizations to have "career expats," employees who have stayed abroad for more than 10 years, continuing to collect generous housing allowances, cost-of-living adjustments and reimbursement for their children’s education. To rein in spending, employers are using a variety of strategies. They’re sending fewer workers overseas, replacing traditional three-year stints with short-term assignments, localizing expats, offering less generous perks and hiring third-country nationals or local talent instead of sending a U.S. employee overseas.

    "A lot of companies are trying to come to grips with the fact that they don’t know what the [total] costs are for international relocation," says Rick Schwartz, CEO of GMAC Global Relocation Services, in Oak Brook, Illinois. "It’s kind of scary. I’ve heard it so many times, from large, prestigious, well-run organizations. But the need to do business around the world is increasing significantly. The question facing many organizations is: How can I move more, but in a cost-effective way?"

    Employers today also face the painful fact that it’s more expensive to send workers abroad. The U.S. dollar has weakened against European and Asian currencies, making it even more costly to send workers to cities where the cost of living has increased. Tokyo, for example, ranks as the most expensive city for expatriates, followed by London, Moscow and Osaka, Japan, according to a 2004 survey by Mercer Human Resource Consulting. In Tokyo, an expat can expect to spend $4,501 per month on a luxury two-bedroom apartment rental, $4.73 on a cup of coffee and $5.48 on a fast-food hamburger dinner. By comparison, in New York City, the same apartment would cost $3,500 per month, the coffee $3.30 and the dinner $5.75. The weakening of the U.S. dollar has made some companies more selective about whom they’re sending abroad. Last year, 62 percent of companies had 50 or fewer expatriates, a level that hasn’t been recorded since 1997, when 69 percent had 50 or fewer expatriates, according to a recent GMAC study. Twenty-one percent of companies sent between 101 and 500 employees overseas last year, the lowest level in four years. Overall, about one-third increased the number of expatriates last year, 35 percent had no change and 34 percent reported a decrease.

    Given its downsizing, Agilent had no choice but to reduce its number of expats. "It’s hard to be laying off people and have these expensive relocations going on," Contino says. "You can’t justify that." As a way to further cut costs, last year Agilent introduced a new scaled-back set of expat benefits designed for intra-regional moves, relocations within European or Asian countries or within the Americas. Many of Agilent’s international transfers were intra-regional, and those expats were getting a full-blown package of benefits that wasn’t always necessary, Contino says. For international moves, extra provisions can be added at the manager’s discretion. On long-term assignments, for example, employees now receive a smaller housing allowance, and can ship their own household goods by land, which is less expensive than renting furniture in a host country. And for short-term assignments, families aren’t automatically allowed to join the employee. The decision about who goes is at the manager’s discretion.

"A lot of companies are trying to come to grips with the fact that they don’t know what the [total] costs are for international relocation."

    Like Agilent, the DuPont Company, in Wilmington, Delaware, doesn’t know how much its expatriate program is costing or exactly how many expats it has. After studying the program last year, DuPont discovered that some expatriates had become "professional transferees," going from one three-year assignment to the next, in some cases staying abroad for more than 10 years, says Tom Marshall, DuPont’s former relocation manager, who retired in June. The company has approximately 500 expatriates, a number that is expected to increase as it moves research and development work to China. DuPont wants to set up a database to track international transferees, standardize its policies and determine the total cost of the program. Some changes are already in place. After expats reach their three-year mark, their case is reviewed to see if they should stay. "If you’re going to be successful, you have to be global," Marshall says. "Everybody is recognizing the cost associated with it and saying, ‘We have to do something about that.’ "

    For many employers, sending employees on short-term assignments is becoming an increasingly popular way to cut costs. Last year, 70 percent of international assignments were scheduled for one year or less, compared to only 13 percent planned for that duration in previous years, the GMAC study reports. Avaya Inc., a provider of communication systems in Basking Ridge, New Jersey, started sending more employees on short-term assignments two years ago, says Susan Wong, vice president of global benefits and executive compensation. The assignment, generally six months long, is treated more like a business trip. The employee stays in a hotel or company apartment and is reimbursed for meals and trips home every other month, eliminating the need to pay pricey housing allowances and costs related to moving the employee’s family. The company, which has 15,000 employees, is now tightening its policies for short-term assignments. "We want to treat employees on a fair and equitable basis . . . rather than basing it on each person’s negotiating power or each manager’s willingness to say yes or no," Wong says.

    On short-term assignments, expats typically don’t take their families with them, and this is part of another growing trend; only half of the companies in the GMAC survey reported that expatriates had their children accompany them during their international assignment, the lowest percentage in the 10-year history of the survey. In fact, to control costs, some organizations are changing their traditional profile of an expatriate by targeting younger employees who are single and more mobile, says Robert Wesselkamper, international practice director for Watson Wyatt Worldwide in Chicago. They’re putting them in a country with nominal support, perhaps a $1,500 bonus, and then localizing them on benefits and pay.

    Another strategy Avaya has used to control costs is hiring third-country nationals. An employee from Belgium, for example, might work at a site in Spain or France. Avaya currently has 365 foreign nationals, about half as many as it had two and a half years ago. By hiring foreign nationals, the company saves because benefits such as tax assistance, education for dependents and housing allowances are offered for a limited time. Also, foreign nationals aren’t paid a cost-of-living adjustment, a hardship allowance or an expat premium. Foreign nationals also typically don’t need as much time to acclimate because they don’t face the cultural barriers that an American might, Wong says.

    There’s no language problem, for example, if someone from Hong Kong is sent to work in another city in China, and that person also is in tune with the business style of the region. Avaya keeps its number of expats low--currently at 15, down from 90 two years ago--by localizing those employees. Once expats are localized, Avaya phases out housing and schooling allowances after a year, pays employees in the local currency, switches them to local health benefits and doesn’t have to pay for income taxes in both countries. For an expatriate who earns a salary of $100,000, the dual income taxes alone cost $140,000, Wong says.

    Companies are starting to get employees to consider localization earlier, pushing for a decision up-front or during the first year, says Schwartz of GMAC. More companies, too, are hiring employees locally and not using expatriates at all. It can cost a company half as much because local hires do not enjoy the traditional expat perks, such as maintaining pay equity, access to a maid and driver and reimbursement for children’s schooling, Wesselkamper says.

    Companies also are controlling costs by following a more careful selection process. Industry statistics show that 40 to 50 percent of international assignments fail either because the expats come home early or because they leave the company within a year of returning home. With failed assignments, organizations see no return on their investment and then must restart the process with a new expat, Schwartz says. Avaya protects that investment with at-home mentors who keep in touch with expats while abroad and help them make a transition to a new position when they return, Wong says. "The company has invested in this person. To leave him overseas or to lose him to another company is a waste of money."

Workforce Management, October 2004, pp. 84-87 -- Subscribe Now!