Definitions

relocation costs

Relocation services

Relocation services or "employee relocation" includes a range of internal business processes that are engaged to transfer employees, their families, and/or entire departments of a business to a new work location. Like other types of employee benefits, these processes are usually administered by human resources specialists within a corporation and outsourced to different types of service providers. Relocation Services are not synonymous with Moving/Relocation Companies as not all of these companies offer "relocation services."

Such business processes can include domestic residential services where an employee moves within a country or state as well as international relocation services which include planning for (diplomats, managers etc.) working abroad. An agency providing relocation services directs and manages the process of relocation including arranging necessary documents (visa, long-term stay permissions), finding a new house (accommodation), finding a school for children (education), finding a job for the partner or "trailing spouse" (work) and arranging a teacher for the family (language teaching).

Cost of international relocations for employers

Dating back to the Dutch East India Company, sending an employee to work in another country (sometimes called a "global assignment" in current HR jargon) has carried considerable costs while theoretically opening the potential for financial returns for the employer. However, companies contemplating increased expatriate placements, within their home countries (inbound) or overseas in host countries, are frequently penny-wise and pound-foolish with respect to real vs perceived costs.

Perceived relocation costs are easier to identify and therefore receive the most critical attention. Real costs are the sum of all direct and indirect expenses associated with the transfer. Compounding this challenge is the current state of many corporate finance systems, which are not designed to track relocation or to assign management cost data. Relocation cuts across many areas, including travel, transportation, human resources and payroll.

With tax equalisation, housing allowance, cost-of-living adjustment and other benefits, the typical expatriate compensation package is two to three times the home-country base salary. For example, an expatriate with a €100,000 annual salary will cost the employer €200,000-300,000 per year. Other factors influencing international service assignment cost are the host destination, the size of the family (for accompanied assignments where the family relocates with the expatriate to the host country), the expatriate benefits as per the employer's International Service policy, and home-host taxation. Shorter term assignments have lower costs, especially when they avoid taxation thresholds, so the recent trend has been more short-term assignments and extended business trips. The savings pendulum will swing the other way, however, if expatriate employees are not given enough time to produce it's host country to accomplish their assignment’s specified business objectives, whereby the position becomes a "revolving desk" lacking in continuity or operational momentum.

Additionally, companies with global ambitions have historically moved their employees (domestically) using several decentralised relocation departments, and they often face serious financial and regulatory risks unless they refit or re-educate organisation structures for cross-national transfers.

Different types of expatriate employers

As stated above, the average cost of a single global assignment is typically two or three times the employee’s annual salary. Much of the value or return an employer can expect from expensive global assignments comes from the networks the expatriates develop and the opportunity to exchange skills and knowledge both in and outside the workplace. As the table below illustrates, different types of corporations have different reasons for exporting or importing their talent.

There are three reasons why a company might give an employee a global assignment: filling functional needs, developing the employee for upper management, and developing the company itself. Anne-Wil Harzing of the University of Melbourne further categorises these employees as ‘bears, bumblebees and spiders.’ Those playing the role of bears are the long arm of headquarters control. The bumblebees transfer (cross-pollinate) their corporate culture. Harzing’s spiders weave the informal communication networks so important in connecting far-flung branches, subsidiaries and all strategic partners.

types of corporations making global assignments
ORGANIZATIONAL CHARACTERISTICS ↓ Multinational corporations Global corporations Transnational corporations
CONFIGURATION OF ASSETS & CAPABILITIES decentralised and nationally self-sufficient (Unilever, Philips) centralised and globally scaled, but trending to decentralised model. (automakers, Japanese firms) dispersed, interdependent, and specialised (Matsushita, Siemens)
ROLE OF OVERSEAS OPERATIONS sensing and exploiting local opportunities implementing parent company strategies differentiated contributions by national units to integrated worldwide operations
TYPICAL EXPATRIATE ROLES engineers, specialists as needed senior managers (middle- and line-management are localised) both: specialists and managers, depending on cultural climate
ARE THEY 'EXPORTING' BEARS, BEES or SPIDERS? bees and spiders bears, mostly depends on the country or market: mostly bees & spiders
Moreover, recent advances in IT still cannot replace the importance of face-to-face contact with clients and competitors alike, according to Dr. Jonathan Beaverstock of the UK’s Loughborough University. Beaverstock accurately predicted that expatriation will become more frequent, short-term and project-based.

Addressing relocation programme cost drivers

Any strategic assessment of a corporate relocation policy’s cost drivers begins near the top with a self-recognition of how the company financially accounts for all relocation costs (‘real’), and where those costs are allotted. Applied tactically, a cost recognition function assembles all information on the cost of a transfer, in one place, for case-by-case review and approval.

Relocation cuts across many areas (both organisational and geographic), including travel, transportation, human resources and payroll. Corporate finance systems are usually not designed to track this seemingly unrelated cost data in concert. As a consequence, the decision-maker for any given transfer will be weighing its business value using incomplete (‘perceived’) cost figures.

The employer’s case-by-case recognition of relocation costs means understanding the total cost of any given global assignment before it is originated. Then the finance and HR departments must track and report actual costs to budgets. This represents the smallest category of relocation cost drivers, but the way this ‘inexpensive’ work is carried out can reverberate, multiplying the size of the other, much larger, cost drivers.

During the relocation process, the people managing the relocations (internal or outsourced) must track, report and especially manage exceptions to the relocation policy. Tracking and reporting exceptions will usually reduce an employer’s overall relocation spend by 7 to 9 percent.

Responding to a 2005 Survey of global assignment management practices commissioned by a US-based third-party relocation management company, 31 percent of surveyed employers indicated that they track exceptions on a per-assignment basis for budgetary purposes, 23 percent track exception on an overall basis in order to identify policy components that need review, and 39 percent do not track the cost or type of exceptions granted. (Seven percent were not able to answer the question.)

Internal delivery costs and outsourced supplier service fees

The second smallest relocation cost driver is the process of carrying out the relocation programme, whether it is internal payroll and administrative costs or fees paid to a relocation management service provider. Depending on the size and organisation of a company, different departments, such as finance or human resources, may administer the relocation programme. Some may lack any formal programmes while others have highly structured processes. Moreover, different operating units (who do not always communicate with each other properly) may administer different aspects of the programme.

Some may manage and execute all of their relocation processes in-house while others find value in co-sourcing or outsourcing them. This is done usually for the purposes of saving time, focusing internal resources on inherent company workforce strengths, or for providing better service to each transferee by assigning him or her with a highly responsive ‘single point of contact.’

Hiring an external service provider is sometimes generalised as an all-or-none proposition, connoting a process is conducted solely outside of the client organisation. Yet most outsourcing arrangements are actually a mix of internal handling and outsourcing activities.

Of the companies participating in the 2005 Survey of Global Assignment Management Practices, 43 percent indicated that they either outsource or co-source some assignment management services (staffing 1:58 assignees, 7 percent declined to answer).

Employers that intend to continue providing all assignment management services internally may consider centralising the internal relocation delivery groups. Among the survey participants who fit this category, 49 percent indicated that they deliver services in-house from a centralised group (staffing 1:31 assignees) and 26 percent deliver service in-house and decentralised by business unit (staffing 1:21 assignees), while 13 percent reported a combination of centralised and decentralised in-house assignment management services decentralised by region (staffing 1:18 assignees), and 12 percent reported a similar combination decentralised by business unit (staffing 1:12 assignees).

Measuring (and revising) the relocation benefits

The second largest relocation cost driver is the nature of the relocation benefits themselves, also known as ‘policy design.’ The entire relocation benefit policy ought to be reviewed once every two years by all stakeholders. This process normally involves benchmarking the policy against those of competitors or companies in similar industries. Relocation associations such as Worldwide ERC provide a forum for this type of process and most relocation providers offer policy creation and review as part of their service.

Between these reviews, while a policy is in place, the employer controls costs by judiciously enforcing it. Some companies can do this with ease, while some may face employee morale or internal political issues. For this reason, outsourced service providers enjoy a natural advantage for enforcing policies. When confronted with unreasonable requests from a transferee (who may be a very senior or well-connected executive), the outsourced provider can play the dispassionate gatekeeper and ensure that policies are consistently applied and that the programme is equitable for all employees.

Underlying supplier costs

The cost of removals, home finding, language training, immigration and other services or processes comprise the largest and most tangible part of the global assignment cost pyramid. These costs also tend to be the least flexible —– unless the ‘flexing’ is upward, given the housing and transport sectors. There are two reliable methods for managing these costs. One is to react tactically and reduce the number of suppliers to gain volume price reductions. The second is to think strategically in the way costs are allocated and choose suppliers of these services who demonstrate the best overall value, not necessarily the lowest prices. That ‘overall value’ is not normally expressed down here in the base of the pyramid, but rather how the suppliers can interact or comply with the work being done in the upper tiers.

Length of assignment: cost impacts

Shorter assignments tend to cost less, but a number of cost items remain constant regardless of length of stay since they are typically incurred at the beginning and end of the assignment:

  • Transfer bonus or allowance
  • Cultural training
  • Language lessons
  • Spousal assistance
  • Home finding
  • Travel to destination
  • Air shipment of household goods
  • Surface shipment (delivery to destination residence)

While these costs will not necessarily increase for longer assignments, they may achieve muchless ROI when applied against shorter assignments. Longer assignments may help amortise the costs listed above, but they also carry larger time-sensitive costs:

  • Salary
  • Goods & services allowance
  • Property management at origin
  • Housing expense
  • Home leave or return trips
  • Dependent education
  • Tax preparation
  • Taxes

The employee’s salary would be less relevant to the calculation if he or she could have been performing a similar function for the same business unit without transferring.

Sources for cost section

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