ITX Insights - July 2024

In focus: Global Employment Companies vs. Shared Service Centres: A Comparative Advantage

Considering the potential costs and risks associated with cross-border deployments, organizations cannot afford to have a dysfunctional Global Mobility framework.  Policies and processes must be carefully designed, accurately executed, and constantly aligned to the organization’s strategies and priorities. At the same time, it is often not feasible to have the appropriate level of Mobility resources and experience in every location that either sends or receives an international assignee.

A common solution

To achieve better efficiency, many organizations chose to centralize at least part of these processes and infrastructure into Shared Service Centers, which typically focus on transactional tasks, coupled with Centers of Expertise (COEs), namely Global Mobility teams, who deliver advice to the assignees and Business Units, and primarily focus on the design, governance, strategic alignment and continuous improvement of the mobility programs. This centralization reduces the duplication of efforts and resources, delivers consistent standards of support and advice to the entire organization, helps to rationalize the investment in infrastructure, such as real estate and technology tools and, in the case of Shared Services, it often delivers savings by relocating processes to cost effective locations.  In essence, the Shared Service Center aims to absorb as much as possible of the administrative burden, to release bandwidth in the Mobility team, allowing them to focus on more strategic and value-added tasks.

Some limitations of the typical model

The Shared Services + COE model above usually manages to deliver most of the objectives described above.  Nevertheless, it is important to understand the limitations of such an arrangement and explore how it compares with the Global Employment Company (GEC) approach.

Much of the complexity of Global Mobility is linked to the potentially huge number of permutations of “home and host” countries, each presenting a unique set of challenges. For example, In an organization operating in 10 countries there are 90 possible permutations, while in an organization operating in 20 countries, the number of possible permutations goes up to 380. Fortunately, most organizations tend to have fewer home-host permutations, but the fact remains that complexities can escalate very quickly indeed. 

Unless they are fully localized, assignees are typically employed by a “home country” and deployed to a “host country” using the applicable mobility policy. There are several challenges with this type of arrangement:

(a)   Each group of employees is employed by a different country, hence on different pre-assignment terms and conditions.

(b)   If the policies and processes require employees to be paid through the home country’s payroll, it becomes harder to build a holistic picture of how much the organization is spending on Global Mobility programs.  Each location will have part of the total information, which would need to be consolidated in a separate process step.

(c)    Accounting and internal re-billing of costs can be potentially very complex, as each country may need to invoice multiple countries, and also deal with incoming internal invoices.

(d)   Depending on the combination of home and host countries, the employee may or may not be able to benefit from Social Security Totalization Agreements, allowing the employee to continue the contribution in his/her home country during the assignment.

(e)   Each of the “home” legal entities could potentially trigger a Corporate Tax liability in each host location where the employee is deployed (a tax construct known as Permanent Establishment, or PE).  This will depend on a variety of factors, and not every assignment will trigger a PE risk.  Nevertheless, the sheer number of possible home-host permutations increases the potential PE exposure and makes the monitoring and mitigation of such risk extremely complex.

(f)    Despite the existence of a Shared Service Center and a Mobility COE, inevitably the HR teams in each home and host country would need to be involved in the process to some degree. However, not every location will have the right level of experience to manage the process efficiently.  Typically, quite a lot of coordination and guidance may be required.

(g)   Information and data would need to be exchanged between home country, host country, COE, and Shared Services team, with a great likelihood of data duplication, unless the information exchange is supported by technology tools that are consistently and accurately used by all stakeholders in the process.

(h)   Due to the number of stakeholders involved in the process (Home HR, Host HR, COE, Shared Services), the processes will be “fragmented”, meaning that each team will be responsible for part of the process.  This is one of the most common frustrations experienced by assignees and managers, who need to interact with multiple teams as they navigate the process from start to finish.

(i)     The model is generally less agile, due to the greater need for coordination. Therefore, it is typically harder for the COE to ensure governance and consistency, or to introduce changes in policies, processes, forms, templates or technology tools.  The lag-time between strategy and execution becomes longer, due to the need for communication and implementation across multiple locations.

(j)      Since it is harder to achieve a holistic view of all aspects of the Mobility programs and receive accurate and timely information, it is usually more challenging the COE to make decisions and recommendations on how to continuously improve the mobility programs.

In addition to the above considerations, it is also worth considering that the COE + Shared Services model also requires coordination between these two. Usually, Shared Service Centers and COEs are not co-located, hence a lot of communication is required.  In many organizations, the COE itself is geographically distributed, often with regional hubs.  This decentralization creates further “process fragmentation” and requires additional communication, coordination and, ideally, technology enablement. The geographic and structural separation between COE and Shared Services could result in delays in keeping the two aligned.  In practice, this means that the COE may not have full, immediate and direct visibility of how the Shared Services team is performing, and it may take some time before the COE team realizes that something can be improved.

The advantages of the GEC model

GECs are very versatile structures, which can be used in a variety of ways, provided that all the compliance requirements are observed.   In principle, GECs can be used to support all long-term international assignments, including “global nomads”, i.e. assignees who spend a considerable part of their career away from their home country, and/or to act as the employing entity for employees hired on fixed-term contracts for specific overseas projects.  Some organizations also host their top executives in a GEC, for confidentiality reasons and, in specific cases, GECs could also be used to support some Remote Employees, including in locations where the organization has no legal entity.

In terms of internal procedures, the GEC typically bears the cost of the assignees and re-charges this cost to the appropriate Cost Center in the host location, plus a Management Fee based on an internal Service Agreement.

Under a GEC model, the number of home-host permutations is significantly reduced, since all assignees are deployed from the same legal entity, which makes it easier to monitor and mitigate the costs and the risks, especially since the GEC is often a centralized function, integrating the COE and the Shared Services.

In fact, since the GEC is both the employing entity and the home country, as well as the COE and the point of coordination of administrative processes, it will enjoy much better governance, control and holistic visibility of every aspect of the Global Mobility programs, leading to better analysis and decision-making. From an operational standpoint, policies and processes are interpreted and implemented consistently and correctly, with less involvement from individual home locations.

Furthermore, consolidation of all the assignee headcount in a single entity makes it easier to introduce a single international payroll.  This, in turn, makes it easier to build a global picture of the overall mobility spend, and it greatly streamlines the internal re-billing of the costs to the relevant cost centers.  Management reports become more accurate and easier to produce, especially if an adequate technology tool is in place, integrating payroll, expenses management and invoicing.   The aggregation of the headcount into a single entity also creates economies of scale and critical mass which is useful when designing and negotiating some benefit plans, such as International Retirement Plans or Global Medical Plans.

Depending on its design, the GEC can also provide better harmonization of terms and conditions between assignees of different nationalities, especially those who are in highly mobile roles.  In addition, if the GEC is established in specific countries, it may be possible for GEC assignees to leverage existing bilateral Social Security agreements under certain conditions.

As we ponder on the key differences between a Shared Service Center and a GEC, it is worth pointing out that it is often difficult to convert a Shared Service Center into a GEC.  This is because the location of the GEC needs to be very carefully selected, and many Shared Service Centers are unlikely to be in locations suitable for GECs.  In addition, the skills and competencies typically found in Shared Services are only a subset of what a GEC would need. 

Nevertheless, Shared Services and GECs are not mutually exclusive, and it is perfectly possible to have both within the same organization.  In such cases it is important to ensure that the processes do not become unnecessarily fragmented and that the assignees and managers have a clear Case Manager for each assignment.

In summary, Global Employment Companies have the potential to deliver outstanding benefits to most organizations that hire and deploy employees across borders, beyond what is normally achieved through the combination of Shared Services and COEs. Organizations that have a Global Employment Company typically enjoy a greater simplification of their Mobility programs. Managers and assignees have a clear point of coordination and accountability for the entire end-to-end process. The GEC has full visibility of every aspect of the Mobility Program, as well as each individual case. Ultimately, managers receive better support, faster deployment timelines, better governance and compliance, enhanced risk mitigation, and more effective cost management.

That said, before establishing a GEC, it is critically important to perform a detailed Feasibility Study in order to define the company-specific objectives, anticipate the potential benefits of such an initiative, and build a solid business case for internal discussion.

If you are evaluating the feasibility of a GEC and would like some guidance on how to approach it, please feel free to reach out to an ITX consultant. 

Dispelling the Myth: The Hidden Costs of DIY Global Employment Companies

Establishing a Global Employment Company (GEC) is a strategic move that many global organizations consider, with a view to streamlining their Global Mobility programs. However, the process of setting up and operating a GEC in-house can be fraught with hidden costs and complexities that are often underestimated.

The feasibility assessment, design, implementation, and ongoing operation of a GEC all demand a high level of specialist expertise, therefore it is common and highly recommended to engage external advisors to receive support and guidance throughout this process.  An experienced advisor will be able to provide in-depth knowledge and experience, as well as examples, case studies and answers to key questions, which are crucial for reaching a well-informed decision regarding the set-up, design and location of a GEC.

Once the decision to implement a GEC is made, presumably based on some anticipated benefits, the chosen approach significantly influences the implementation costs and timelines. It is highly recommended to accelerate the “setup” and “launch”, to reap the anticipated benefits as soon as possible. In fact, a delayed GEC implementation often represents an “opportunity cost” that can run into several millions of dollars per annum in terms of unnecessary costs and/or risks. 

An entirely in-house implementation typically requires more time and capital investment compared to a co-sourced or outsourced model. The reason is straightforward: service providers already possess the necessary resources, technology, and skills in the right locations, enabling them to expedite the process.  In contrast, an in-house implementation involves a much longer journey, which includes identifying, deploying, and training internal resources, and making numerous complex decisions regarding infrastructure and technology tools. These tools must be approved, budgeted, selected, procured, configured, tested, and ultimately operated by a team that will need continuous training and support to achieve the required levels of efficiency.

Furthermore, on an ongoing basis, operating a GEC in-house involves several fixed costs, including headcount, real estate, and maintenance and licensing of IT infrastructure. Additionally, significant management time is required to manage internal resources and replace them in case of extended absences, resignation, illness or promotion. At the same time, the return on investment (ROI), in terms of service quality, is highly dependent on maintaining low staff turnover and ensuring that the team is performing to the desired standards, and constantly updated with changes in the regulatory environment globally. Business continuity is another critical aspect, relying on the team’s access to premises, tools, and information necessary for their work.

An outsourced GEC model presents a compelling alternative. Although the GEC remains wholly owned by the organization, it can be operated by a highly skilled specialist provider, thus allowing a much faster implementation, eliminating the need for substantial investment in resources, technology, or real estate, and ultimately delivering the benefits of the GEC much sooner.

By combining centralization with outsourcing, some organizations consistently achieve remarkable agility and scalability. Internal resources can focus on governance and strategic alignment, while a reliable outsourcing vendor ensures the smooth running of mobility programs based on pre-agreed policies, processes, and workflows. At the same time, Service Level Agreements (SLAs) guarantee service quality and business continuity.

The outsourced model can offer financial predictability through a typical “fee per assignee” arrangement. This makes budgeting and cost allocation straightforward for the GEC and its internal customers. Both the cost and the ROI are contractually agreed upon, with the latter measured through predefined Key Performance Indicators (KPIs) stipulated with the service provider.

One of the most significant advantages of an outsourced GEC is scalability. In the event of a sudden decrease in international assignments, as observed during the recent pandemic, the organization saves money thanks to the “fee per assignee” arrangement, avoiding the fixed costs associated with internal assets. Conversely, if there is a surge in the number of assignments, the organization can respond quickly without committing additional internal resources and infrastructure. This flexibility provides substantial agility.

In summary, establishing a GEC in-house may seem like a cost-saving strategy, but the hidden costs and complexities often outweigh the perceived benefits. By outsourcing the implementation and operation of a GEC to a reputable provider, organizations can achieve the desired results faster, more efficiently, and cost-effectively.

Learning Corner: Hiring and deploying without a local entity

Note: This article aims to outline generic principles only. Readers are strongly recommended to seek professional advice specific to their circumstances.

"Employment without establishment" refers to a situation where a business hires or deploys employees to perform work in a jurisdiction where the business does not have a physical presence or a formal legal establishment, such as a subsidiary or a branch. This concept is particularly relevant in the context of cross-border employment and international business operations.  While this situation is not new, the scenario has become increasingly common with the rise of telecommuting and remote work, especially during and following the recent pandemic, which forced many employees to work remotely.

If the organization does not have a legal presence in a country, the question arises as to which entity should employ the employee.  The good news is that there are various options, but it is important to understand the implications of each.  In fact, while employment without establishment offers flexibility and access to diverse talent, it also requires careful planning to address legal, tax, and compliance issues. The key challenges include adhering to local employment laws, managing tax obligations, and reducing the potential exposure to "permanent establishment," which could impose additional tax burdens.

Depending on the jurisdiction and the nature of the work, different employment models may be suitable. Many organizations are already familiar with the use of Employer of Record (EOR) providers, or with the practice of hiring staff as independent contractors.  These approaches have some merits, but also many limitations. In the EOR arrangement, the employee is legally employed by a third-party, which may have implications in terms of representing the parent company in the local market and participating in the parent company's Long-Term Incentive Plans.  On the other hand, engaging workers as independent contractors rather than employees makes it imperative to understand the legal distinction between employees and contractors in each jurisdiction, to avoid misclassification issues.

An alternative option is to hire the employee directly through the original employing company, via a Global Employment Company (GEC). This may require registering the GEC in the overseas jurisdiction, even if it does not have a physical office.  This option preserves a clear and direct employment relationship between the employee and the company, which could be relevant to the accrual of benefits and to the employee’s eligibility for Long-Term Incentive Plans, such as stock options. 

Note that not all countries allow employment without establishment in the same manner or under the same conditions. Therefore, before choosing the most appropriate approach, it is important to consider several factors, including local labour laws, tax regulations, Permanent Establishment rules, immigration requirements (especially when deploying foreign staff), local statutory benefits and worker’s protection.

Therefore, while employment without establishment offers flexibility and access to global talent, it is not universally permitted or straightforward in all countries. GECs can provide a centralized hub for the governance, monitoring and coordination of  employees working in locations with no establishment, and can also act as the single interface for EOR providers, if necessary.  Regardless of the option selected, businesses must carefully navigate local laws and regulations, often with the help of experts, to mitigate risks and ensure compliance while benefiting from the advantages of a global workforce.

ITX News:

Preparing for our next GEC Network Club session – October 2024

ITX hosts the largest network of GEC professionals, who gather twice a year to exchange ideas and updates in a confidential and exclusive forum.  The next session is scheduled for September 2024, and ITX will reach out to the members in the next few weeks to request suggestions on discussion topics.

If you work in an organization with a GEC, or if you are in the process of establishing one, you are encouraged to join this unique network to stay up to date with the latest developments.  Members are also invited to use the private LinkedIn Group to exchange information, ask questions and post updates.  There are no membership fees.

Join ITX at the Global Workforce Symposium in National Harbor, Maryland – October 2024

ITX will share its knowledge of Global Employment Companies at this annual event hosted by Worldwide ERC. The symposium brings together experts from around the world to discuss the latest trends and innovations in the industry, including mobility strategies and practices, immigration, technology and remote work. The symposium offers extensive educational sessions, and interactive workshops, allowing attendees to connect, learn, and collaborate with prominent subject matter experts and speakers.

Join ITX at the Forum For Expatriate Management EMEA Summit in London, United Kingdom  – October 2024

ITX will host a Round Table discussion at the Forum for Expatriate Management (FEM) EMEA Summit, on 29-30 October 2024.  The Forum is an essential gathering for global mobility and HR professionals in Europe, the Middle East, and Africa, offering rich content and networking opportunities. Attendees can participate in workshops, panel discussions, and roundtables, gaining insights into the latest trends and best practices in global mobility. The summit also hosts the prestigious EMEA EMMAs (Expatriate Management & Mobility Awards), recognizing excellence in the field with an elegant awards ceremony. This summit is a key event for professionals looking to advance their knowledge and connect with industry peers.

Find out what a GEC could potentially do for you – Free self assessment and customized report

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