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Today’s difficult economic climate has many companies redoubling their efforts to reduce expatriate program costs. For many, according to Shore, the elephant in the room remains expatriate housing costs, which dwarf all other areas in terms of its cost reduction potential.

Many companies have made substantial expatriate program cost reductions in the past decades. These steps include the elimination/reduction of foreign service premiums and a shift toward a more economical cost-of-living allowance (COLA) approach. Now, more companies are beginning to turn their attention to reducing their housing budgets.

In high-cost housing areas such as Moscow, Russia; London, United Kingdom; Tokyo, Japan; and Hong Kong, China, housing budgets for senior expatriates that run well over USD200,000 a year are not uncommon. Even a relatively modest 10 percent reduction in housing costs for these expatriates would result in cost savings of more than USD20,000 a year and that is prior to factoring in the additional taxes paid on grossing-up this benefit. In contrast, efforts to reduce COLAs generally result in cost savings well below USD10,000 a year.

Because housing is by far the largest discretionary portion of the expatriate package, it presents the largest opportunity for reducing expatriate program costs. But, while housing presents inviting cost-reduction possibilities, companies often have shied away from reining in these costs.

Unlike a foreign service premium or a COLA, housing often is not centrally controlled, with power over budgets distributed in the field. This creates institutional barriers to change that require substantial senior management support to overcome. The fact that the current economic situation has focused management attention on reducing costs may provide the political will needed to tackle housing costs. The open question is how to best seize the opportunity and create a more cost-effective housing program.

Housing Audit—Measuring Your Housing Program

One of the biggest challenges companies face simply is getting a handle on their current housing budgets. Housing data usually is not centrally stored and often exists only in informal silos in the field. Moreover, even when companies receive a consistent package of rental data from a data provider, actual practice in the field may diverge substantially from the published rental standards. It is the rare company that truly knows whether its housing standards in Kuala Lumpur, Malaysia, are equivalent to those in Mexico City, Mexico, or Dubai, United Arab Emirates.

There are clear benefits to auditing your program. An audit provides headquarters with measurements of your program’s overall generosity and whether the standards are consistent globally. We recently performed a housing audit for a company with well over 1,000 expatriates in the field. Through this audit, the company discovered that its expatriates were spending substantially below budget and pocketing large amounts of the saving through their cost-savings program (more on housing cost-savings programs later). Based on the audit, the company is lowering its housing budgets globally and expects to see savings of approximately USD2,000,000 a year by 2011.

Even where practice is mixed, with expatriates both above and below published guidelines, patterns often emerge in the data. For example, companies may discover that expatriates are spending consistently below the guidelines when they are single, and then use this data to drive reductions in the housing budgets for singles.

Similarly, patterns may emerge in certain cities. For example, it becomes much easier to reduce housing budgets in Madrid, Spain, if you can show headquarters and regional management that your current budgets in that city are substantially higher than for other European cities.

Senior Management Support

There often is a power imbalance between those requesting exceptions and those who approve them. If you are a manager at corporate headquarters, rejecting exception requests without significant internal support can be hazardous to your career.

One of the functions of a housing audit is to elicit senior management support. Senior management often looks at exceptions on a case-by-case basis and this practice generally favors the expatriate (“Jane needs a four-bedroom townhome overlooking Buckingham Palace to be near to both schools and work.”). A housing audit can help counter this tendency toward approving individual exceptions by looking at a broader overall picture.

If you are attempting to reduce global housing costs, it is necessary that senior management be squarely and publicly behind the initiative. Moreover, to keep the program on track, it is best if exception approval processes can be shifted toward more senior staff, even if in name only.

One major multinational, for example, insisted that any housing exception be signed off on by the divisional president and the CEO. Whether this was a rubber-stamping exercise or not, it served as a significant deterrent to having an expatriate seek an exception.

Another company insists that the expatriate build a business case for housing exceptions, not unlike any other capital expenditure. Moreover, exceptions above a certain threshold need senior management approval.

Cost-savings Program—Incenting Responsible Behavior

For the majority of companies that pay on a guideline approach, there is no incentive for the expatriate to seek out housing below the guideline. In fact, the guideline often appears to them as a jumping off point for further negotiation and, as many in the field are well aware, expatriates typically are highly skilled negotiators.

In fact, expatriates often calculate what the “return on complaint” is in determining whether they will ask for a budget beyond the guideline. If they see many other expatriates in the field who have housing above the guideline, they are likely to seek out an exception, as well. Exceptions beget exceptions.

A housing cost-savings program allows the company and the expatriate to split the cost savings below the guideline amount. For example, if the guideline was USD4,000 per month, but the expatriate found a rental at USD3,000, then one cost-savings approach would be to split the USD1,000 savings equally between the expatriate and the company. This would mean USD500 per month in the pocket of that expatriate.

One current trend in the marketplace is that companies have been eliminating or are considering eliminating their housing deduction (although this trend may be slowing because of the current economic downturn). In return, they have been waiving support of all home costs, whether loss on sale, professional management fees for renting the expatriate’s house, or the like.

An additional item companies may want to consider is lowering the guideline amounts in conjunction with the elimination of the housing standards. The housing guideline then potentially could be rebranded as a housing subsidy. This subsidy would be intended to cover the majority of host housing costs. Ex­patriates would be expected—but not required—to contribute up to 15 percent of their base salary toward these costs.

For example, an individual earning USD10,000 per month would be expected to contribute up to USD1,500 per month toward host housing costs. If the subsidy provided was USD4,000 per month, requests for exceptions would be triggered only by requests for housing above USD5,500. Moreover, there would be a substantial incentive for expatriates to find rents between USD4,000 and USD5,500, as they get to keep all cost savings in this range.

Ultimately, there are many different ways to structure cost savings, and no one way is “correct.” However, when structured properly, they can go a long way toward incenting more economical behavior among expatriates and reducing requests for exceptions.

There often is a tremendous dissymmetry of information when a request for an exception comes in from the field. The expatriate has spent days looking at rental homes. Those tasked with approving the exception often have little information beyond the expatriate’s description that all units below budget are infested by cockroaches the size of Texas.

The first step in improving information flow is providing clearer guidance to the expatriate, the real estate agent, and the destination services provider (DSP) about what the expected housing standard/neigh­borhood is. This helps guide all parties away from areas that may be inappropriate to their budget/level (e.g., a townhome in Knightsbridge). An example of the information provided in our Inter­national Housing Guide can be found in the chart at left for a family with a budget of GBP4,000.

While providing information that aligns the expectations of all parties is helpful, it is no panacea for eliminating exception requests.

Other helpful steps include:

1. Create an exception process that kicks in when expatriates seek to view rental properties above their budget. Once you have seen the Taj Mahal, it becomes increasingly difficult to accept a lesser housing standard. If you force the real estate agent/DSP to make a request before showing above budget properties, you may be able to prevent this problem.
2. Create a template that the DSP must fill out about each property viewed. This would ideally include information on neighborhood, type of unit (home versus apartment), size of unit (number of bedrooms and square footage), special features (pool, ocean view, and the like), asking rent, and reasons the expatriate liked or disliked the unit. Pictures of the various units also are useful. This data is helpful in analyzing whether the exception is reasonable, and it can serve as a deterrent to the expatriate requesting the exception (Does the expatriate want it to be known that only those units with swimming pools and ocean views are acceptable?).
3. Reconsider how you incent your real estate agents/DSPs. For a real estate agent, the higher the rent, the higher the commission. For a DSP, it is easier to get positive reviews from the expatriate if the DSP acts as an advocate for a higher housing budget.

For both real estate agents and DSPs, having a higher budget also means less time spent searching for the property that meets the expatriates needs and is within budget. One simple step to take would be to provide performance bonuses based on attaining housing within the budget guidelines.

For those seeking cost reductions in their expatriate policy, the economic time is right for reviewing and implementing these reductions. To achieve these cost reductions, it is best that you audit your program to obtain objective measurements of where you stand.

With this data in hand, it is critical that you garner senior management support. Implementation of these new standards presents substantially more challenges than implementing a COLA reduction because the power to determine housing budgets often is decentralized.

In addition, consider how to best structure your program through incentives, information flows, and exception approval processes to ensure a smooth and successful operation. Ultimately implementing reduced housing standards requires a substantial upfront investment of time and energy, but it promises the ongoing dividends of reduced expatriate housing costs.

Michael Shore is senior manager for AIRINC, Cambridge, Massachusetts. He can be reached at +1 617 354 2133 or mshore@air-inc.com.