How do you know if you are getting your money's worth from an expatriate assignment? Carrie Shearer reports on the two ROI models you can use.

Most companies have one or two expatriates who are cost insensitive. They provide so much value to the company that any expense to keep that expatriates and their family in the assignment location is worth it.

Ignore this elite group of expatriates, however. At a time when companies are critically analysing costs and searching for creative ways to do more with less, is it important to know the value created by expatriate assignments?

The concept of measuring the return-on-investment (ROI) of expatriates has been debated for years; however, according to a recent survey of expatriate practices conducted by GMAC GRS, NFTC, and SHRM Global, there is no “universally understood and accepted” definition for the term. Their study and my interviews confirm that the most common definitions include:

• low expatriate turnover, either whilst on assignment or when repatriated;
• accomplishing the assignment objectives; or
• obtaining increased revenues for the business entity.

Why is it difficult to define expatriate ROI? The costs of sending an expatriate are immediate and tangible while the return or value created by the expatriate is intangible and extends over time.

There are currently two schools of thought concerning measuring expatriate ROI.

Financial model

The financial model determines if the expatriate pays back the incremental costs of the assignment. It sees expatriates as investments and makes the assumption that any gains or losses in a business entity are attributable solely to the performance of the employees. Quite a leap of faith!

Calculating expat ROI requires converting qualitative behaviour into quantitative measurements, which is not an easy task and requires agreement between both HR and line management.

Then the company must measure the impact the expatriate makes on the financial performance of the company by measuring the expatriate’s performance on specific tasks and weighing the accomplishment of these performance measurements against differences in the financial performance of the business entity.

Sydney Robertson of ORC, an HR consulting firm, claims that calculating ROI “necessitates pushing the concept of measuring human capital to a point where each job family can be associated with their contribution to the revenues and ultimate income of a business.”

This may be possible for certain key jobs where their contribution is easily measured, but what about assignments where the expatriate is sent for career development? How do we evaluate the cost of sending an expatriate to Singapore today so that in 10 years that expatriate will have the expertise to run a larger business entity? Will anyone even remember the cost to Singapore in 10 years' time?

According to Mike Schell, CEO of RW3 (http://www.relowizard.com/), there are five steps involved in using the financial model:

1. Define the assignment objectives.
2. Agree on quantifiable measurements for the assignment.
3. Develop an equation that converts qualitative behaviour into quantifiable measurements.
4. Evaluate the expatriate’s performance against these measurements.
5. Calculate the ROI. This can be a complex cost accounting or a simple calculation to see if the expatriate covered the cost of keeping them on assignment.

One obvious challenge to the financial model is acquiring all the costs associated with an expat assignment. Several accounting firms and HR consulting firms have software to help gather these costs.

Although these programs get at the costs paid out of the sending company or reported by local company, what about the hidden costs? Should the cost of expatriates include the salary and benefits of the employees, in both the home and host country, who manage the expatriates? What about the additional payroll costs? Should the costs include lost time spent dealing with problems with the expatriate package or family concerns?

Another concern with ROI is when it should be measured: When the expatriate leaves the area, the year after or at some point in the future? When looking at financial returns, companies generally take a long-term view. Should they do the same when calculating ROI for expatriates? Do we expect the return to continue after the expatriate has left the location?

A third concern is, do we need yet another cost accounting system? Does HR have the time to gather the data, come to agreement on measurement criteria with line management and do the calculations? Is there a benefit to be gained or, should we look for another method?

Strategic model

The strategic, or commonsense model is a non-numeric way of evaluating the value of an expat assignment.

It requires answers to two basic questions: “Who do you have on assignment and why are they there?” according to Paula Caligiuri of Rutgers University and Caligiuri and Associates.

“This model looks at how successful the expatriate was at accomplishing what the company wanted. If this is a development assignment, did the expatriate gain the desired competencies?” For each assignment the company must be able to tell what would have happened had that expat not been there. In cases where expatriates are sent out to do a specific task or put out a fire, this is fairly easy to determine. For developmental assignments, the company must work out what the long-term effect would be if they do not have globally trained senior managers in the future.

A proponent of the strategic model is Michael Elia of the Expat Technology Forum, which has developed a simple technology-based tool to assist line managers and HR in determining that the proper candidate has been selected for a particular assignment.

The tool helps determine the “value potential” in the international assignment and the measures the success of the assignment in realizing its value potential. Rather than cost accounting, this model assists companies in understanding the business drivers in each assignment and measuring the value received rather than simply the costs spent to maintain the expatriate.

Selection of the right employee for the assignment and clearly elucidating the expectations of the assignment are crucial in the strategic model. If the expatriate is simply told to “Go out there and do your job” with no other guidelines, what are the chances they will train a local to replace them if they are in a nice location?

However, if they are told that they have three years to find and train their replacement and that they will be removed from the assignment location at the end of the three years, the expatriate will be more likely to do what is required.

The strategic model is not as scientific as the financial model, but it forces companies to look at the reasons they are sending an expatriate. Armed with this information, the company can determine if the goals were accomplished by looking at what would have happened had this person not been there.

Emerging trends

The real question may not be can a company determine the value of an expatriate assignment but can a company justify the need for an expatriate? Many progressive companies are not looking at ROI.

Instead, they approach the concept of value by exercising more control in the selection process and watching the costs of the assignment. This often means being creative and using several extended business trips rather than a two- or three-year assignment.

Conclusion

As we have learned with so many other magic bullets that were going to make our lives easier, increase corporate profits and give us brighter smiles, ROI may not be the answer until we decide what the question is.

What is it we want and expect from our expatriates? Without clarification, how can we expect any employee to give us their all, especially one who is in a far-flung area? And, without a clear understanding of what we want an expatriate to accomplish, how will we know if we have received a return?

To start looking at the value created by employees, HR should make sure that the expectations of the assignment are clear to expatriates and that their performance is measured against these expectations.

September 2002