by Amanda Vermeulen
Getting your policy wrong can be a painfully expensive mistake
SOUTH African companies are carving out a reputation for themselves among the world’s leading multinational companies. Once trapped within the confines of our borders due to political isolation, SA companies are now ambitiously spreading their wings and finding new territories to explore to bolster revenues and broaden market share.
However, these exciting new commercial adventures have come at a cost. The world’s leading multinationals have learned from difficult experience that staffing far-flung operations is a complex job. For one, the cost of sending expatriates into the field is exorbitant. But worse, the high percentage of expat contracts that fail is often a cost to the company that’s overlooked or unexpected – to the detriment of the profitability and success of the foreign operation.
The statistics are enough to make any company considering foreign expansion stop dead in its tracks. The average cost to a company in the first year of a single expat contract is anything upwards of US$250 000. The cost of a failed expat contract is about three times the employee’s annual package.
Roughly 40% of all expat contracts fail. Failure is not only defined as expats returning home, but also staying on at a low level of productivity. This means that getting the process of expatriating an employee and family wrong can be a painfully expensive mistake for any company.
Despite the reams of research available to any company looking at opening an office overseas, SA companies have been slow to learn from the costly errors of their foreign counterparts.
Expatriate Preparation has worked with blue chip SA and multinational companies to implement what MD Kevan Hawley calls proactive expatriation using a variety of alliances.
One alliance partner is Mike Muir, who, like Hawley, has been an expatriate and senior executive of a large SA multinational. Hawley and Muir say that where things go horribly wrong is in the poor design of a company’s expatriate policy.
When it comes to devising an expat policy, Hawley and Muir say that most SA companies have little idea of the myriad financial and legal ramifications of globalisation. Likewise employees, often blinded by the US dollar salaries and the perks offered, leave home without considering what’s expected of them and what they’ll be entitled to.
Hawley and Muir cite numerous examples of employees expecting companies to pick up extraordinary costs and getting away with it because their expat policies have not provided definitive enough parameters about what the company will pay for and what’s for the employee’s own account.
One of the most important issues, says Muir, is that many SA companies have failed to pay enough attention to changes in this country’s tax regime and how it will affect the remuneration of expats.
Other issues such as which country’s labour laws should be applied to the contract, how disputes should be managed, what happens in the case of a severance by either party, medical and insurance obligations, workmen’s compensation and changes to the expat’s marital/parental status must be carefully considered.
One of the consequences of a company not doing its homework properly is that the employee arrives at his new post and suddenly finds himself faced with all sorts of unexpected costs that make his previously glamorous expat package look a lot less attractive, says Muir. This can make for an unhappy employee which can jeopardise the foreign operation.
Of course, there’s no exact science to calculate the cost of an expat contract as each situation can vary in some cases, quite significantly. However, obviously certain issues remain constant. And, as Hawley and Muir say, it’s important that the prospective expat knows exactly what he’s getting. Finding out once he has uprooted his family, moved them across several time zones and into a foreign culture that his five-year posting is more like a prison sentence than paradise is guaranteed to result in a failed expat contract with all its attendant costs.
Expatriate Preparation, which has been in this game for several years, is part of an alliance that pools the tax expertise of companies such as Deloitte & Touche, the remuneration skills of Britain’s Employment Conditions Abroad, the moving and relocation experience of Elliott International, the offshore banking infrastructure of Standard Bank Offshore and the medical track record of EuropAssist.
The partners in this alliance can be called on by any company planning to open a branch overseas to provide it with advice on everything from transporting pets to the tax regime in Guatemala.
For example, Employment Conditions Abroad has compiled a matrix from information provided by member companies that helps other subscribers calculate appropriate levels of remuneration for expatriates as well as other vital information.
However, Hawley and Muir say that the company involved must acknowledge the need to do its homework properly and not just send its staff off into the great unknown with a suitcase and an envelope full of US dollars.
There needs to be a proactive rather than a reactive approach, Muir says. The latter can be very costly and it leads to bad feelings with employees. The so-called soft issues surrounding expat contracts often turn into hard problems if glossed over by companies. These include ignoring the need to acknowledge the importance of the spouse/family in writing any contract, including the benefits and perks to which they may be entitled.
Hawley, who has had extensive experience in preparing employees and their families for expat life, says that a number of SA companies still overlook the important influence a spouse has on his/her partner’s success in an expat contract. Of the 40% of failed expat contracts, a significant portion can be attributed to the failure of the spouse/children to adapt to new surroundings.
Then there’s the problem of employing what are known as Third Country Nationals citizens, say, of the US working for an SA multi-national in, for example, Morocco. The US employee will be used to a US dollar-based salary while his SA counterpart will receive a rand-based package. Calculating their respective packages, while bearing in mind their different expectations and experiences, can give any human resources manager nightmares.
Which raises the next point. While most companies are only concerned with their employees while they’re at work, managing a team of expats is a 24-hour job due to their responsibility for non-work related issues, such as accommodation, schooling, health care, security, transport, pets… the list goes on and on. Suddenly, the company with global ambitions needs an entire department of HR managers to cope just with the firm’s expat teams which again is a sudden, unexpected and usually unpleasant additional cost.
Hawley says that both the HR and finance departments need to be singing from the same hymn sheet when it comes to establishing and managing a successful expat operation. Without a co-ordinated approach, the expat venture is usually doomed from the start.
There are a number of things that an SA company with global ambitions can do. First, learn from the experts by seeking advice from other multinationals or companies that have been in the game for years. There’s no need to reinvent the wheel.
Second, have a checklist based on a logical process that works along a time line. A good place to start would be with departure issues, through to transition, arrival in the new country, relocation and transport issues all the way through to the end of the contract, to relocation back to the home country and even including the calculation of a pension.
A chronological approach will help the company concerned cover as many eventualities as possible, especially if it also consults other businesses which have already been down this road.
Though some SA companies still insist on going it alone and learning the hard way, others have seen the benefit of tapping into the expertise of major US and European multi-nationals that have usefully made all the mistakes already and paid for them.
Hawley says that SA oil, technology and manufacturing companies have been particularly quick to draw from the expertise of others that have gone before them. Many have realised the benefit of sending expats and their families to look at what they’re getting into before they sign any contracts.
Expatriate Preparation has guided over 2000 expatriate families, both leaving and entering SA, as well as HR practitioners. It’s a small cost compared with the potential black hole in a balance sheet caused by repeated failed contracts, Hawley says. Expanding globally can kill you, because it can completely decimate cash flow.