“Localisation is a process to transition an expatriate status into a semi or completely local employee status,” says Cathy Loose, global mobility leader for Mercer’s Information Product Solutions in Asia Pacific.
ORC Worldwide’s International Localisation Policies & Practices survey in 2007 reveals that localisation of expatriates is on the rise. Singapore stands fifth (14%) among nations where companies are permanently localising employees. The survey also says despite having a policy, most companies deal with localisation issues individually.
Why localise?
According to Loose, the key driving forces behind localisation are cost containment and succession planning. “Localisation usually starts with changing employment status and therefore impacts all related compensation and benefits that an expatriate is currently receiving.” Loose adds that converting an expatriate package into a local one is highly considered if the company plans to spearhead its cost cutting measures as an expatriate package generally costs two to four times more than a local one. Conversion is also dwelled upon if the company looks at succession planning in terms of transitioning an expatriate position into a local position.
Christina Moh, HR director for Elsevier Asia Pacific, echoes Loose’s words when she says the obvious benefits any company derives through localisation are cost containment and business continuity.
However, there are challenges for HR to overcome when localising expatriate employees. “When expatriates come with full perks, it becomes difficult later to accept a localised package, as this will mean out of pocket expenses or giving up a specific lifestyle they have become accustomed to,” Moh says.
Loose believes that attraction and retention are key issues Mercer’s clients face, particularly with key talent or very senior executives the company tries to either recruit or retain. “Most expatriates that were on an expatriate package are reluctant to accept a local or local plus (local package but with some subsidised allowance, such as housing and educational) package.”
Furthermore, Loose says localisation is particularly very challenging if companies localise expatriates that come from high-pay home countries, such as US, Europe, Hong Kong, Singapore, in a lower-pay country such as China, India or Vietnam. Additionally, the inadequacy of benefits coverage, such as health care and retirement or pension benefits, in certain countries are added barriers to the overall localisation process.
David Crook, head of Nokia Siemens Networks’ Global HR Center of Expertise in Asia Pacific and Africa, says like most companies, his organisation actively pursued reduction in expatriates during 2009 through both repatriation and localisation in cases where local replacements were not available. “The challenges faced in localising were numerous, including retaining scarce talent, managing expectations, ensuring that a local replacement was not available and keeping the employee motivated while reducing the overall package cost.”
But Crook adds that companies tend to consider the cost of schooling and housing in assessing whether an expatriate could be effectively localised. “In cases where the family included three or more children,” he says. “The challenge was much greater as the cost of schooling and housing was of greater significance than in families with fewer or no children, or in cases of single expatriates.”
Phasing out perks
Moh says some companies have clear policies that indicate a maximum duration for an assignment after which the expatriate either returns to his home country or takes a localised package. “Policies are clearly articulated to assignees prior to the move and they are given sufficient mental and monetary preparation for eventual localisation, if they decide to continue in the host country after the assignment ends.”
She also mentions that there are companies that localise their expatriates through a gradual phasing basis where a percentage of benefits are shaved off year on year till the total removal of perks. “While this is a fairly effective strategy in helping an assignee deal with localisation, it still causes pain,” Moh says. But she adds that resistance could be significantly lesser if there are personal tax gains to be derived for the expatriate in going local.
“At Nokia Siemens Networks, we chose a three-year ramp down period where the company only partially subsidised housing and schooling,” Crook says. He explains that this would allow a sufficient transition period for expatriates to adjust to local circumstances. “All other expatriate benefits were harmonised immediately upon the signing of a local contract.”
Loose says a lot of companies try to phase allowances and incentives over a period of time, particularly housing and educational allowances. “Housing and educational allowances are the two most contentious incentives that are critical to expatriates and are generally not phased out immediately. Other allowances such as cost of living allowance (COLA), hardship allowance and home leave travel tend to be phased out immediately - from day one when the package is localised.” She adds that phasing out strategy depends on the kind of approach the company chooses to apply - immediate localisation from day one for all benefits, or middle approach, in terms of slowly phasing out allowances over a period of time.
In converting an expatriate package into a local package, Mercer would first ask the client to consider:
a) If this a critical talent that the company must retain;
b) If the localisation process is driven by the company or by the employee (for example, the employee decides to stay permanently in a host location);
c) The company’s key objectives with regard to the localisation process.
Loose says once the company is clear about its plans, there can be several options in conversion. Local plus is generally a middle approach of localisation where some expatriate allowances and benefits are kept for a period of time while other components are converted into a local package. “For example, under a local plus arrangement, salary would be converted into the local pay structure but the company would still provide housing and educational allowance,” Loose says. Complete localisation would mean that all expatriate benefits and incentives cease from day one. “The employee would now be under local arrangement from compensation to benefits coverage.”
Transition
Though employees everywhere are aware of localisation packages and their purpose, it could get difficult initially to help them understand the company’s approach. They would also need help in dealing with the changes that removal of perks would bring into their lives. “Early communication with employees to explain the rationale behind localisation is the best approach,” Loose says, and adds that it is important to ensure that the proposed changes are competitive and in line with the market.
Moh says ideally, any company should allow at least six months to plan a conversion as the final decision will have a huge impact on the family of the assignee. “If the localisation plan does not go through in three months, the business will still have enough time to kick-start an internal or external search for replacement.” She says that HR teams need to partner effectively with their business leaders to understand the longer term goal beyond the assignment. “Be upfront on probable career plan even before the assignment starts.” Moh says that if career plans are in line with individual goals, it is likely to smoothen out the discussion with the expatriate as the assignment draws to a close. “Ongoing career discussions between the assignee and manager should intensify when the expatriate is into his or her final year of assignment.”
Crook says in many cases, the localisation discussion commences three months before the end of the expatriate contract period though from his organisation’s experience, the initial discussion on possible localisation would have already taken place at the beginning of the expatriate contract to assist in managing the expatriate’s expectations. “Usually, after the end of the three year transition, all localised employees are paid within the relevant local job grade range.” Crook adds that the company has successfully retained a greater majority of the expatriates it localised. “However, it remains to be seen if they will continue to stay in the country when the three year transitory period is up and they no longer have any housing or schooling subsidy.”
Expatriates or locals?
The debate on hiring expatriates versus hiring locals continues into this decade too as employers try to deal with the pros and cons of hiring expatriates. ORC’s survey covered 285 participating companies, located in the Americas (55%), Europe (34%) and Asia (11%). One-third of participants employed fewer than 50 expatriates, 28 percent between 50 and 249 expatriates, and the remaining 26 percent employed 250 or more. The group represents a wide range of industries and the 285 companies have a total staff of more than 13 million employees, of which 89,009 are expatriates, and 6,333 employees localised over the last two years.
As Moh says, hiring expatriates drives business continuity as seasoned internal talent can be plugged and played immediately, requiring little runway. These resources also accelerate the embedding of the company culture, especially in new start-ups. Likewise, they play a key role in facilitating the removal of work roadblocks with their knowledge of the organisation’s internal networks.
Loose says that hiring practices of expatriates will depend on the market. “For emerging markets, such as China, India, Vietnam, where local skills (particularly for senior management and specialised technical positions) are still lacking, it is necessary for organisations to import talent from overseas to grow and manage the business.” She adds that for more developed markets, such as Singapore and Hong Kong, local talent is readily available, and so, it is not so necessary to hire expatriates. “At the end of the day, the gist is that expatriates can be valuable in terms of knowledge transfer to local talents. However, companies need to have a well-defined succession planning process in place to ensure that the knowledge transfer takes place within a designated period.” Moh says that there are minuses too to hiring expatriates. “It is cost-prohibitive, and they may not be familiar with local laws, practices and customs.”
Singapore sees many multinationals because of the stability it offers and also because it is relatively more affordable than most regions in Asia. It becomes easier then for companies to convince their employees to move to Singapore or even to accept localised or local plus packages. Singapore’s government has set in place many initiatives for expatriates to encourage them to be in the city-state. ECA International’s recent study has put Singapore in the 12th place with regard to cost of living for expatriates across Asia. Singapore is approximately 15% less expensive than archrival Hong Kong and stands out in affordability when compared with many Chinese cities, Seoul or Tokyo.
Companies are trying to cut costs and localisation seems to be one of the better ways to curb expenses. As one analyses the trend, it becomes clearer that Singapore will see more of it in the coming days. It is essential now more than ever that HR teams seek more ways and means of helping companies handle costs through localisation, without losing indispensable talent at the same time.
