Industry Market Trends

Hiring Pitfalls of Expanding Overseas and How to Avoid Them

Sep 24, 2013

When a U.S. manufacturing company is ready to expand overseas for the first time, executives frequently underestimate the complexity of international human resource issues. They may not know the right questions to ask or the things they need to think about to avoid the pitfalls that await. 

The first thing that a company typically does is send somebody from the home HR office to contact local legal counsel specializing in employment law in the host country, according to Dr. Wayne F. Cascio, professor of management at University of Colorado and author or editor of 27 books on human resource management.

This ensures that the company complies with a number of legal requirements, especially those pertaining to recruiting or hiring. "You want people who are very, very familiar with a particular area and culture. That's why local counsel is very important," Cascio told IMT.

"The first challenge people have is around cultural sensitivity and cultural understanding," said Katie Davies, senior director for advisory services at High Street Partners. Those challenges can be a factor even in countries with close ties to the U.S., such as England, she said. "We may share one language, but there are very big differences in the ways of just actually dealing with people, the communications style, and the culture and values that people have," she said.

Cascio advises CEOs to avoid the urge to parachute in expats. There's wonderful local talent and the sooner a company is able to tap that talent the better, he said.  "You want somebody from HR who speaks the language and knows the customs. It's going to make you look like an insider in the markets where you are trying to do business," he said.

Understanding the HR legal environment is essential. U.S. companies should seek legal counsel for advice about compliance with laws governing pay systems, minimum wages and overtime. "If you're going to Western Europe, you better not run afoul of the local labor laws and workforce," said Cascio.

That's where a local HR manager, who has institutional knowledge of the country's regulations, can prove invaluable.

"The biggest issue that they [manufacturers] have is finding the right talent. If you get the right talent first time around, it makes your life much easier down the line," said Davies. Companies will frequently fall victim to significant loss of employees in the first year because they haven't thought about how to "on-board" their talent. That can result in lost recruitment fees when those new hires walk out the door. "As soon as a company starts building up a management team locally and perhaps recruits a local HR manager, that seepage or loss of cost starts to go down," she said.

When it comes to benefits, can a company give the same kind of package it would give in the U.S. and use U.S. plans? Such benefits would be inappropriate or contrary to best practices in Europe, she said. The European Social Security system often provides different kinds of benefits and U.S. companies run the risk of over-providing benefits. "You need to make market adjustments and take market compensation data from recruiters," said Davies.

Other HR legal issues that must be addressed by US. companies expanding overseas include unemployment compensation, insurance liability, civil rights, collective bargaining, inform and consent, and data privacy information.

Data privacy refers to the kind of personal information that can be collected and where it can be stored. For example, information about EU citizens cannot be stored in the U.S. without going through a detailed process. "These are little things that can easily trip up an organization that is trying to set up an HR department overseas," cautioned Cascio.

How a company wants that overseas subsidiary or branch to operate presents the ongoing dilemma about how much to centralize and how much to localize. Businesses must decide whether to have standard policies that apply everywhere in the world or to tailor them to specific regions, said Cascio, "It's a huge issue and each organization has to make its own decision," he said.

Davis added that U.S. companies are averse to relinquishing control to local HR managers, particularly in the startup phases of expanding into a foreign country. Executives invariably refuse to give local HR managers complete autonomy, she said. There will be regular or feedback sessions and all significant decision-making is usually kept in the U.S. "The challenge for the local HR manager is actually articulating from the U.S. what the problems may be," she said.

There is the danger of local HR teams building up lots of frustration if the U.S. team runs roughshod and overrule the local decision making -- thinking they know best -- even though they are making uniformed decisions, which often times can create local tensions.

HR tends to operate in a silo, separately from other groups within the organization. Davies said it's really important for key stakeholders within an organization, including the payroll team, the HR group, and the legal team, all communicate with each other. There are many interconnected elements that cross into HR, but actually affect other teams.