Revisiting cost drivers to make mobility affordable for small and midsize mobility programs By Ulrike Hellenkamp and Cindy Van Loo, Mercer In most small- to mid-sized organizations, the mobility department is riddled with challenges old and new. With so many moving pieces and factors involved in sending employees on assignments, cost continues to be the primary challenge that these global organizations seek to address with a variety of known and experimental solutions. In Mercer’s 2017 Worldwide Survey of International Assignment Policies and Practices, 37% of mobility professionals indicated that “costly conditions” are a large or very large obstacle to overcome, making it the top-of-mind obstacle when it comes to challenges these professionals face. So how do mobility professionals address the persistent and ever-changing challenges surrounding costs? It starts with first identifying the cost drivers, and then strategically leveraging both traditional and new approaches to mobility management and budgeting holistically. What Are the Mobility Cost Drivers? Expat packages can become expensive and quickly. For most small and mid-sized mobility programs, higher budget needs are often driven up due to the overall costs of expatriate packages, and most companies will inevitably place more pressure on the mobility managers to find ways to minimize these costs. However, for small and mid-sized organizations, other common cost-driving challenges likely include: Smaller talent pool - With a smaller talent pool to choose from, you’re often forced to offer some extra incentives to either get the appropriate person into the role or hire new (which can cost even more). Existing staff not prepared to move internationally - This can also lead to additional incentives to get staff not only prepared but willing to relocate. Recruiting internationally mobile talent not on the HR hiring radar - With mobility departments representing only a smaller part of a larger company as a whole, HR recruiters might not be looking for the skills that would be ideal for an internationally mobile employee. Company headquarters is more attractive than host locations - Convincing an employee to relocate to a less than desirable location is often more difficult, and more costly, especially when their current location is much more attractive. Employees want to remain close to the business’ key stakeholders and leadership teams at HQ. Traditional Cost Cutting Approaches Traditionally, cost-conscious mobility managers look for some of the more obvious ways to save money on each individual assignment package, or package type, to be provided. For example, they might examine a regular assignment package and compare it against a much lighter version to identify and select cost-cutting opportunities within all the elements of a compensation package, or group of packages. With a regular assignment package and a light assignment package side by side, you can start to tinker with the numbers to make adjustments that make sense on paper. These opportunities might include reducing amounts for a number of different assignment package elements, such as: Cost of living Quality of living Housing Premium and incentives Capping certain expenses Furthermore, traditional cost optimizations are typically about evaluating a tax equalization strategy versus a tax protection strategy, which is essentially determining whether or not to shift the burden of tax liability onto the employee or keep it at the employer level. That is, with tax equalization expatratiates see no gains or losss versus their home countries, whereas with tax protection employees are shielded against paying higher taxes than at home but may benefit from lower taxes in the host location. Pros and Cons of Traditional Cost Cutting and Optimization Approaches Traditional approaches do indeed help limit costs, but they might not always address any issues in the long-term. Pros Easy to implement Quick wins Common and well-known approach Cons Reduction in allowance perceived as a negative Overall impact often minimal Short-sighted, no long-term vision Risky Unfortunately, there is no one-size-fits-all approach that works for every assignment package. Thus, you must evaluate the pros and cons of each and every traditional cost-cutting strategy before you can truly identify what will work best for your company. Smarter Cost-Cutting Strategies HR professionals are also beginning to leverage newer, more creative (and effective) strategies for limiting mobility program costs. Smart doesn’t always mean easy, and smart approaches aren’t always solely focused on quick wins. Smart approach philosophies are more internally focused. They look for avenues in which unnecessary costs can be reduced or streamlined, and it is less concerned with actually cutting existing costs at the surface level. Mobility professionals should be looking at a variety of impactful change initiatives. Talent Assessment Sometimes, simply broadening your talent scope might actually save significant costs in the long-term, which can also help achieve short-term reductions for the cost of individual packages. Consider the following options regarding your talent market: Consider upskilling of local staff - If you already have a presence in a particular market or part of the world, a new assignment in that same location might be best served by hiring from that actual market instead of moving a new person to the area. This would save the company quite a bit in terms of the costs associated with moving a person, and maybe their whole family. Overall, this can reduce a lot of complexity with the compensation package, as well. Leverage voluntary mobility - Certain talent within your organization might be eager for the opportunity to travel and work on an assignment. These individuals are less concerned with the financial aspects and might see the greater value in the experience itself. International assignments with clear purpose and business case (KPI) - Before finding talent for any assignment, you might also revisit the reason why you need that assignment in the first place. Once you’ve answered that question, you can begin to determine the appropriate key performance indicators (KPIs) for determining how well that assignee has performed, and communicate them to the appropriate stakeholders, including the assignee and leadership teams. Communication Instead of slashing costs across the board, communicating with your company leadership can also be an effective way to help them better understand why traditional cost-cutting approaches might not be the best option. When people look at the broader cost of mobility, organizational leadership tends to only focus on the costs associated with long-term assignments. But this can be a flawed approach that results in incomparable data as it lacks, for example, consideration for the cost of employee travel outside of long-term roles. If the organization favors several short-term visits instead of a one long-term assignment due to costs, they are likely not accounting for the extra costs associated with per diems, hotel stays, transportation and commuting, etc. because these costs aren’t always baked into a compensation package the same way that they are for long-term assignees. Mobility professionals could make the case against this approach in decision-making by pointing out this potential flaw in comparing the cost of one approach to the other. Challenging the Traditional ROI Metric ROI is very difficult to quantify for long-term assignments, but it is often one of the first things that cost-cutters will want to examine before making key monetary decisions that affect your mobility program. And while ROI is a key metric for business leaders to examine, it still remains a bit of a mystery number when applied to the value of return through your mobile workforce. There is no tried and true method for quantifying the exact value of return on the investments for internationally-mobile positions, global mobility initiatives, and the assigned employee(s). When challenged to prove your ROI, consider asking the following questions on how that ROI metric is compiled: How often are assignees promoted over the general employee? How do assignee resignation and turnover rates compare to those of the organization as a whole? What is the overall value of the experience gained by expatriates? Luckily, mobility department effectiveness is less likely to be evaluated using ROI metrics due to the complexities of quantifying it accurately. In fact, when asked whether they had established how to determine the RIO for international assignments, only 2% of organizations answered yes. Still, 21% of organizations are in the process of establishing this metric (Source: Mercer’s Worldwide Survey of International Assignment Policies and Practices). Revisiting your Strategy: Policy Design & Application Planning out your policies and practices is the best way to establish a solid foundation within the mobility function of your company whilst minimizing costs proactively. A well-drafted policy should take into account all the various elements that might help drive future decisions when new assignment packages are being developed. A revised strategic approach to your policy design might address any or all of the following: Policy segmentation, including alternative assignment forms. Local plus compensation is most commonly applied as cost reduction mechanism although it doesn’t always lead to real savings (Source: Mercer’s 2018 Local Plus Policies and Practices Survey). Clear and precise policies that reduce costly ad hoc decisions. Avoidance of costly exceptions by providing the right guidance room for flexibility. Consider where you see the most requests for exceptions. Is it the housing allowance? Education? Home leave budgets? Revisiting Operations and Delivery Revisiting your departmental operations and delivery is another smarter way to reduce overall costs through optimization tactics. Manage risk by ensuring compliance and to avoid costly penalties Delivery efficiency by establishing automation of delivery, strategic outsourcing and vendor management, and optimizing provider costs relative to relocation and taxes. Advantages of the Smart Approach Similar to the traditional approach, the smart approach is characterized by several inherent pros and cons. Pros Sustainable results with longer-term benefits, not short-sighted Challenges are tackled in a thoughtful and strategic manner Cons More difficult to set up, sometimes unrealistic Limited options with regard to talent pool when only considering local staff options Still a need for incentives The Holistic Approach The holistic approach to reducing mobility departmental cost drivers is very much based on the principle of “zero-based” where every cost and budget line item is evaluated anew instead of relying on duplication of what has ‘worked” in the past. The concept is basically like starting fresh, from the ground up, evaluating every aspect, function, and factor that impacts the costs of mobility. By revisiting everything, one can incrementally change things for the long-term, while identifying the most common areas (in terms of policy and packages) where flexibility and market adaptation is most needed. Using the zero-based concept, the holistic approach should avoid simple cost-cutting exercises and top-down decision making and instead focus on ensuring alignment with company vision or strategy and assessment of the root causes of high costs. How might this approach be applied to policy segmentation? Policy Segmentation As previously mentioned, policy segmentation can be an effective long-term strategy for reducing costs. Determining policy segments using the zero-based principle helps mobility professionals and leadership alike re-align on the purpose of the mobility function. What are the main reasons for having assignments? Whereas the traditional approach might benchmark competitive segmentation practices in the market and leverage that data to adopt similar segments, the zero-based approach is more introspective. For example, leadership might ask: Why do we need assignments? What is the business need? What talent are we moving? With these questions answered, only then can you begin to truly develop policy changes that address what you really need, what could be waived, and what would be nice to have if the budget allowed it. Expatriate Compensation Applying zero-based philosophies to re-define your expatriate compensation packages starts with revisiting and confirming your remuneration strategy. You might ask: What is your general compensation and benefits approach? How much emphasis do you place on having competitive packages? What are your specific assignment requirements and aspirations (value proposition)? Then, consider: Which allowances are a must? What could we stop paying? What could be simplified or re-defined? What is the affordability line for the nice-to-have elements of the package(s)? What Works for the Small- Mid-Sized Enterprise? In summary, small- to mid-sized enterprises are well-positioned to implement impactful change that reduces the costs of their employee mobility. As you can imagine, implementing sweeping changes (in both operations and strategy) will be much more difficult to manage with thousands of assignees located across the globe. But with fewer expats currently on assignment, implementing relative changes becomes a bit easier to see through to completion. It’s imperative that mobility professionals continue to evaluate their effectiveness as a department, as well as their costs across the board, from operations to compensation and beyond. Cost-cutting is not a bad thing, but any and all cuts should be strategic in nature, and HR professionals shouldn’t shy away from revisiting departmental strategies and operations in their quest to reduce costs. These types of strategic evaluations are more likely to proactively keep costs lower in the future for all stakeholders, and address cost from the employee to executive leadership perspectives.