The Localization Transition
As organizations scramble to improve workforce management in today’s global marketplace, the notion of “localizing” employees is gaining ground, often as a cost-cutting measure.
In the past, the term “localizing” often meant hiring qualified local workers. Today, it increasingly refers to the process of converting the status of employees who’ve been sent abroad from an expatriate standing – which usually entails home-country-based salaries and benefits – to “localized worker” status. A localized worker receives salaries and benefits that are more in line with those of the host country. But moving to a more localized model presents various challenges, so transitions must be handled in a skillful manner.
According to “2004 Emerging Trends in Global Mobility: Policy and Practices Survey,” from Cendant Mobility, 34% of those queried said localization will emerge as a top issue in global mobility concerns over the next two years. Respondents also said the major challenges to localization in the next two years are compensation (26%), retirement and pension (24%) and taxes (12%) (Hauser, 2005).
Companies must decide where and when localization programs will be most acceptable to their employees. Localization tends to be most relevant when a company plans to have a significant number of employees working at a particular destination for long periods of time. If a company expects only a series of assignments that are fairly short term, then localization is not usually feasible (Fender, 2005).
The transition from expatriate to localized employee works best when the worker is prepared and knows that, after a certain period of time, traditional expatriate benefits will end. Such planning allows employees enough time to adjust and plan for integration into the local system. One approach to localization is a phase-out of traditional expat allowances over a period of up to six years. Such planning encourages timely transitions (Hauser, 2005).
There are several major considerations for corporations that want to localize employees. Cost containment is, of course, of great importance. According to one company, cost savings range from 65% to 90%, depending on location, when a local employee instead of an expatriate fills a position. But substituting expats for local workers is not always feasible. Therefore, the cost to the company is considerably reduced if an expatriate is localized to regional terms and conditions. Localization also helps to maintain fairness when local employees performing the same job with no special benefits work alongside an expat who does have more perks (Fender, 2005).
Localization can result in some added complexities. For instance, perhaps the employee must pay taxes in both the home country and the host country. Does the company have an obligation to assist employees in paying these? And what of retirement plans – is the employee able to contribute to a 401(k), and will it add up to as much as it would in the home country? These can be significant and sometimes costly problems, especially with employees that plan to repatriate. An employee who works in a foreign country may, for example, need to participate in two retirement plans. In some cases, employers may need to determine how localizations affect social security and whether the employer should help with a “totalization” agreement (Dwyer, 2004). (Totalization is a treaty between some countries that allows expatriate workers to pay into only their home country retirement system for a period of time).
It’s true that some companies are simply turning to local workers rather than localizing expats, but this strategy isn’t always the best option. There are locations that require expatriate help (Sellami, 2005), places where local workers with the right skill sets can be hard to find. In China, for example, an entire generation from 1966 to 1976 was taught by Chairman Mao that capitalism was wicked. Add to that the Confucian tradition of hierarchy, where rank and status are of utmost importance, and some regions of China have many potential employees who have talent but who don’t have a grasp of Western business values and are unaccustomed to speaking out. This can be problematic when dealing with Western business people, according to Anthony Wu, head of Ernst & Young in Hong Kong and China. He notes that “we have decided not to tender for some major clients because we feel we don’t have the staff to service them” (“China’s People,” 2005).
In fact, only a minority of multinationals are completely replacing expatriate talent with local talent, suggests, PricewaterhouseCoopers’ “Expatriate Localization Survey 2004.” The study of localization found that 58% of the 40 multinational organizations queried in the study use local contracts when hiring foreign workers but offer them a premium above local compensation, called “local/local-plus.” Another 30% of the companies are converting workers abroad from full expatriate status to “local/local-plus” status, while just 12% are replacing foreign talent with local talent (Lixin, 2005).
In short, localization remains a work in progress, one that can be difficult to administer. The good news is that more companies – often with the help of specialists in the field - are gaining skills in how to make these transitions, allowing their organizations to move more gracefully into the expanding world market.
For an Economist article called “ China’s People Problem,” click here.
For a piece called “Strategic Approach to Overseas Transfer of Japanese Employees,” click here.
Documents used in the preparation of this TrendWatcher include:
“ China’s People Problem.” The Economist, April 16, 2005, p. 60.
Dwyer, Timothy. “Localization’s Hidden Costs.” HR Magazine, June 2004.
Fender, Brenda. “Everyone Wants to Do It, but How?” Mobility, March 2005, pp. 18-22.
Hauser, Jacqueline A. “A Business Case for Localization.” Mobility, March 2005, pp. 25-29.
Lixin, Wan. “Considering the Local Option.” China International Business, February 21, 2005.
Sellami, Hayet “Expatriates in China: Changing the Package.” China International Business, June 29, 2005.
“Strategic Approach to Overseas Transfer of Japanese Employees.” Keidenran (Japanese Business Federation), November 16, 2004.
In the past, the term “localizing” often meant hiring qualified local workers. Today, it increasingly refers to the process of converting the status of employees who’ve been sent abroad from an expatriate standing – which usually entails home-country-based salaries and benefits – to “localized worker” status. A localized worker receives salaries and benefits that are more in line with those of the host country. But moving to a more localized model presents various challenges, so transitions must be handled in a skillful manner.
According to “2004 Emerging Trends in Global Mobility: Policy and Practices Survey,” from Cendant Mobility, 34% of those queried said localization will emerge as a top issue in global mobility concerns over the next two years. Respondents also said the major challenges to localization in the next two years are compensation (26%), retirement and pension (24%) and taxes (12%) (Hauser, 2005).
Companies must decide where and when localization programs will be most acceptable to their employees. Localization tends to be most relevant when a company plans to have a significant number of employees working at a particular destination for long periods of time. If a company expects only a series of assignments that are fairly short term, then localization is not usually feasible (Fender, 2005).
The transition from expatriate to localized employee works best when the worker is prepared and knows that, after a certain period of time, traditional expatriate benefits will end. Such planning allows employees enough time to adjust and plan for integration into the local system. One approach to localization is a phase-out of traditional expat allowances over a period of up to six years. Such planning encourages timely transitions (Hauser, 2005).
There are several major considerations for corporations that want to localize employees. Cost containment is, of course, of great importance. According to one company, cost savings range from 65% to 90%, depending on location, when a local employee instead of an expatriate fills a position. But substituting expats for local workers is not always feasible. Therefore, the cost to the company is considerably reduced if an expatriate is localized to regional terms and conditions. Localization also helps to maintain fairness when local employees performing the same job with no special benefits work alongside an expat who does have more perks (Fender, 2005).
Localization can result in some added complexities. For instance, perhaps the employee must pay taxes in both the home country and the host country. Does the company have an obligation to assist employees in paying these? And what of retirement plans – is the employee able to contribute to a 401(k), and will it add up to as much as it would in the home country? These can be significant and sometimes costly problems, especially with employees that plan to repatriate. An employee who works in a foreign country may, for example, need to participate in two retirement plans. In some cases, employers may need to determine how localizations affect social security and whether the employer should help with a “totalization” agreement (Dwyer, 2004). (Totalization is a treaty between some countries that allows expatriate workers to pay into only their home country retirement system for a period of time).
It’s true that some companies are simply turning to local workers rather than localizing expats, but this strategy isn’t always the best option. There are locations that require expatriate help (Sellami, 2005), places where local workers with the right skill sets can be hard to find. In China, for example, an entire generation from 1966 to 1976 was taught by Chairman Mao that capitalism was wicked. Add to that the Confucian tradition of hierarchy, where rank and status are of utmost importance, and some regions of China have many potential employees who have talent but who don’t have a grasp of Western business values and are unaccustomed to speaking out. This can be problematic when dealing with Western business people, according to Anthony Wu, head of Ernst & Young in Hong Kong and China. He notes that “we have decided not to tender for some major clients because we feel we don’t have the staff to service them” (“China’s People,” 2005).
In fact, only a minority of multinationals are completely replacing expatriate talent with local talent, suggests, PricewaterhouseCoopers’ “Expatriate Localization Survey 2004.” The study of localization found that 58% of the 40 multinational organizations queried in the study use local contracts when hiring foreign workers but offer them a premium above local compensation, called “local/local-plus.” Another 30% of the companies are converting workers abroad from full expatriate status to “local/local-plus” status, while just 12% are replacing foreign talent with local talent (Lixin, 2005).
In short, localization remains a work in progress, one that can be difficult to administer. The good news is that more companies – often with the help of specialists in the field - are gaining skills in how to make these transitions, allowing their organizations to move more gracefully into the expanding world market.
For an Economist article called “ China’s People Problem,” click here.
For a piece called “Strategic Approach to Overseas Transfer of Japanese Employees,” click here.
Documents used in the preparation of this TrendWatcher include:
“ China’s People Problem.” The Economist, April 16, 2005, p. 60.
Dwyer, Timothy. “Localization’s Hidden Costs.” HR Magazine, June 2004.
Fender, Brenda. “Everyone Wants to Do It, but How?” Mobility, March 2005, pp. 18-22.
Hauser, Jacqueline A. “A Business Case for Localization.” Mobility, March 2005, pp. 25-29.
Lixin, Wan. “Considering the Local Option.” China International Business, February 21, 2005.
Sellami, Hayet “Expatriates in China: Changing the Package.” China International Business, June 29, 2005.
“Strategic Approach to Overseas Transfer of Japanese Employees.” Keidenran (Japanese Business Federation), November 16, 2004.