Return on Investment What Are Your International Assignments Worth

Peer behind the walls of today’s corporations and you’re likely to find executives analyzing and scrutinizing a constant stream of bits and bytes from their spreadsheets. As they sift through return on investment and net margins, long-term debt and capital expenditures, they struggle for ways to eke out ever-greater profitability and productivity. Managers know the value of their assets; they know the worth of their capital expenditures. They can print out simple arithmetic equations that show measurable results. They can produce clear statements about performance management objectives.

Yet, when the topic turns to international assignments, it’s as if someone has pulled the plug. There’s a disconnect. In an era in which everything needs to be value-proven and cost-justified, many corporations don’t even know the number of international assignees they have. Nor do their HR managers track the real costs. Equally important, these managers can’t tell you the value contributed by these international assignees.

So, who cares? Senior managers, that’s who. And they’re putting lots of pressure on HR. As greater sales are generated by companies’ global operations, and as the United States moves from an era during which international assignments were an anomaly to one in which they’re a daily business reality, senior managers will watch more carefully the revenue generated by these transferees.

It’s clear that international assignments account for an ever-growing portion of today’s corporate growth. The “1996 Global Relocation Trends Survey” by the National Foreign Trade Council and Windham International, both based in New York City, suggests that 43 percent of corporate revenue is generated outside of headquarters’ countries. But, it’s not enough to examine and cut expenditures, and it’s no longer adequate simply to guess that assignees are accomplishing the business task at hand. Today’s HR managers face a more complicated job: determining whether international assignments are yielding a positive return on investment (ROI).

The critical first step is to assess and assign value and expense. Next, HR must weigh the value against the cost. But caution. We’re heading into uncharted territory. The process is likely to require a paradigm shift supported by a combination of hard, quantifiable data, technology, and good, old-fashioned intuition and management experience.

Quantify the return.
Assigning a dollar amount to the value, or the return, from an international assignment is the greatest return-on-investment challenge facing global companies today. It’s such a tough proposition because companies and consultants are still struggling to create systems and standard processes to assist with calculating value.

“It’s difficult to measure value if you take an isolated view. You need to take a holistic viewpoint across your corporation,” says Andy Johns, head of expatriate employment policy and services at Shell International in The Hague, Netherlands. For one thing, departments that incur the costs don’t necessarily acquire the value. Costs are immediate, and value is derived over the long term. Furthermore, costs are visible; value is intangible. For example, to groom an individual as general manager of a large European operation, it’s common practice to develop that person first with an assignment in a smaller operating company. Most often, that employee is charged to the operating company for which he or she currently works, although that unit is only accruing part of the value. The value attained by other parts of the company needs to be accounted for as well.

Add to that the challenge of attributing value in such situations as when you send “Employee Jim” to establish the marketing of a new product in Poland. How do you quantify Jim’s marketing expertise, his flare or his management capabilities? How do you decide if you really need to have an expatriate in the location or if a business traveler or a long-distance “virtual expatriate” would be equally effective? You can collect data, you can use past experience, but at some point, you must rely on judgment and intuitive sensibility.

It all starts with setting clear objectives. “Measuring success depends on what you’re trying to achieve,” says Lauren Attinelly, consultant for Expatriate Policies and Practices for Shelton, Connecticut-based General Electric Co. “What are the objectives that one is trying to measure against? In some respects, they’re going to be in the eyes of the beholder. You’ve got success based on what the employee thinks, what the family thinks, and what the business and company goals and objectives are. I even wonder if there can statistically be a correlation between an individual’s performance and the company’s revenue.”

Calculating ROI for an international assignment in the typical sense is certainly difficult, as Attinelly points out, but not impossible. Johns suggests examining what he calls, the value drivers—the reasons for sending transferees. First is governance, or sending someone to translate corporate culture. Second is technology transfer, which involves teaching the local national staff how to use a new technology and then leaving it with them. Third is a skills shortage. There aren’t enough drilling engineers in a country, for example. And, finally staff development assignments focus on developing a future cadre of individuals capable of running a global business.

Employees sometimes fulfill more than one of the value drivers—other than governance, which typically would be restricted to senior levels. Once an employee has been with the firm for a while, he or she can transfer internationally to fill a skills gap. The employee can teach skills (accomplishing technology transfer), and, at the same time, he or she is also learning. If all three of these activities are occurring at the same time, you need to figure out how to put a price tag on each one.

Notice the different kinds of value offered by each of the four types of assignments and how each must be measured differently.

• Governance assignments communicate the corporate vision.
• Technology assignments bring technological know-how to new regions. This can be accomplished in different ways, rendering different types of value. The short-term choice might be to bring a local person to a technological center and transfer the technology to him or her. For example, you could bring a Malaysian to The Hague. Or you could send an expatriate to Malaysia who could transfer technology to three or four Malaysians.
• Skills shortage assignments bring needed skills to another region. The value of this type of assignment is easiest to quantify because it’s unambiguous. You can price the skill in the open market as if you were hiring an individual from a competitor. The questions then become: Is a competitor’s employee cheaper than an expatriate of yours? And will the company continue to need those skills after the international assignment is finished?
• Staff development assignments cultivate management skills for the future. In terms of measuring, the value here is a little less obvious. “You can look at the alternative cost this way: If I had to go out and buy that finished product [employee] on the open market, how much would it cost me?” says Johns. The cost might be in terms of executive search or the salary premium one would have to pay in comparison with a home grown employee.

So far, so good, but there’s more. “The clear-cut business decision becomes a little more difficult to make when you move away from the production arena and get into areas of marketing and similar types of activities,” says Johns. “For example, [let’s say your company’s] pricing structures across Europe and strategies for market penetration need to be integrated, so you begin to build a European cadre of marketing experts. But it’s not easy to prove why you should be putting that German in Paris or that French [person] in Madrid. It’s not a skills shortage. Instead, you’re saying, ‘I’m building an organization for the medium-term that’s able to change its game—getting out of a national game and into a European game and, if necessary, into a global game.’

“Establishing the hard-wired link between the value proposition and the cost is where it gets really tricky,” concludes Johns.

Use performance management systems to define value.
“When you think of companies looking at their return on investment, they usually have a dedicated group measuring it,” says Attinelly. “Have organizations really set up the infrastructure to be able to measure ROI [for international assignments]? Are companies really setting objectives when they send people overseas? Are they communicating what those objectives are? And, are they measuring against them? And, if that group of expats is helping the mission, [have the HR managers figured out how to] tie in those individuals to a percent of growth?” In most cases, the answer is, “No.”

“There’s a mismatch,” says Alan Chesters, consultant with London-based ECA International. “Typically, domestic HR operations expend tremendous effort measuring performance and do a superior job in developing performance objectives and appraisals. But HR doesn’t spend much time looking at the individual cost of an employee. In other words, you don’t take one secretary and compare that output at the end of the year with other secretaries. No one worries about the unit cost of an employee; HR looks at the collective cost of an activity.”

The opposite is true for international assignments: There’s less effective performance management and greater focus on cost. “We need to reconverge those two intentions,” Chesters says. “In international assignments, we must have more exacting performance reviews and then correlate them with cost and value.” For example, you may worry about the high cost of a geologist doing oil exploration as an expatriate in Vietnam, but if he or she discovers oil, the cost is infinitesimal compared with the return.

“[Senior] managers are putting pressure on the HR function about the costs of expatriates because that’s the only thing they can really get their hands around; whereas domestically, they have all the measures for working out whether they’re actually getting value from that cost,” Chesters explains.

Chesters enumerates four categories of data collection that HR needs to improve to provide a sensible analysis of the value of individual assignments. HR managers should ask themselves—before, during and after the assignment:

1. What are the expectations? HR should establish and record appropriate objectives before assignments begin.
2. What commercial benefit will the company achieve from the assignment?
3. What will the individual gain? Consider the value of the expat experience that wouldn’t have been available to the employee if there hadn’t been an international assignment. (This should be measured by the perceptions of the employee and the organization.)
4. How will the organization as a whole benefit? How is it going to use the expertise the employee has gained and added to the enterprise?

“If you can find ways of measuring these factors and demonstrate the growth commercially, organizationally and individually, then the difference [in cost] between $10,000 in tax and $20,000 in tax for an assignment is insignificant. That’s why identifying costs and placing value on the assignment is critical. The qualitative elements can be measured, and although I’m not as sure of the accuracy of [those] quantitative results [on a one-to-one basis], you can attribute them to the influence of expatriates as well as from others,” says Chesters.

It shouldn’t be a surprise to discover that efforts at performance measurements are meager. As a matter of fact, a survey by New York City-based William M. Mercer Inc. indicates that only 15 percent of 52 U.S. companies that responded to the survey have formal procedures for measuring success. Yet Mercer’s April 1997 survey, “The Management of Internationally Mobile Employees,” states that there’s an increasing recognition among participants (who represent Australia, Europe, the United Kingdom and the United States) that value is as important as cost.

Measure the investment.
If the first hurdle in the ROI process is to determine why you’re sending an assignee and to identify the value of the assignment, then the second one is to monitor the costs, or the investment. Unfortunately, most companies don’t keep detailed records of everything that’s spent on expatriates. They usually have a good handle on reportable information for tax returns or compliance, but that’s just a part of the equation.

“When companies look at their investment, they may run a cost projection to see the expense of having an expatriate, but they won’t include many items or associated manpower costs to keep that person there. They look at actual cash spent and paid directly to the expat or on behalf of that expat. But they don’t look at the staffing requirements in HR to keep track of all this: the payroll resources, the system resources,” says Carolyn Gould, partner-in-charge of expatriate compensation and administration services for the Morristown, New Jersey, office of Price Waterhouse LLP.

As surprising as that oversight may seem, it makes sense historically. It used to be that headquarters staff sent expats. It was easier to track costs because the company was dealing with one nationality coming from one place: the headquarters country. But as firms became multinational and sent individuals from different locations, what may have started as one national policy developed into several regional policies. For example, European transfers have one policy and Asian transfers have another. The policies were administered within local regions and may have been completely different. Consequently, headquarters staff wouldn’t even know who was moving around the region. Some companies are so decentralized they don’t even have a complete list of international assignees.

“Many times divisions resist centralizing these functions because they want to make their own decisions. But the purpose of centralizing the administrative function is strictly so that a single group is monitoring and implementing what the business unit wants,” says Gould. “It isn’t necessary to give up autonomy in order to gather data and control expenditures,” she explains. So the first step in finding the information for the cost half of the formula is to consider centralizing data.

Next, begin to identify costs, the obvious ones and the hidden ones. There are three different types according to Gould: 1) Administrative costs include the time costs of everyone who has some interaction with the expatriate and would have had this interaction whether the employee was international or domestic. An example is payroll. 2) Actual cash and allowances include what the company spends on the expats. 3) Lost work time includes the cost of administrative-system breakdowns that create questions and complaints. For example, if you look at the hourly rate for an expatriate with all the allowances, what’s the cost of each phone call regarding errors? Gould says she has one client that had more than 200 expats who logged 3,000 phone calls, e-mails and faxes between themselves and management. Almost 57 percent were related to payroll errors. “That’s a waste of time,” she says.

HR managers need to take the time to examine overall procedures and processes, making sure they’re tracking everything that’s important. According to Gould, timing is a critical factor, especially for residency. HR may miscalculate its tax costs, for example, if it doesn’t understand and track specific time sequences. For instance, in Japan, if an expat is in the country on the first day of the year, the individual will be taxed on the entire prior year; if the expatriate leaves prior to January 1, he or she doesn’t have the same tax liabilities. This example may seem simple, but only if you know who is where and when they arrived.

Measuring ROI for international assignments is indeed a tremendous endeavor that extends throughout the scope of the global organization. It begins with identifying the strategic aims that managers believe the transferee is supposed to accomplish. Next, HR needs to develop a system for measuring value, including instruments to monitor and measure performance. Finally, it necessitates developing systems to track expenses, both long- and short-term, obvious as well as hidden, to obtain a complete picture of the costs. The process is demanding and requires careful thinking and planning, along with all the aids available today: technology, current workable systems and good, solid judgment.