You’ve established stable operations in your HQ country and demonstrated that you can be trusted; now company leadership has challenged you to extend your service multinationally. It’s a familiar story, which can lead to unfamiliar territory. Organizations that have expanded service delivery outside their core locations have learned hard lessons about the people and HR challenges that can ensue. In hindsight, some of these lessons may seem obvious, but in the excitement of delivering a project, it is easy to be shortsighted.
The logic for expanding shared services multinationally is clear and has been well documented in previous editions of Shared Services News. However, organizations considering establishing shared multinational operations need to tread carefully. People and HR programs that work well in home countries may well be alien overseas.
Multinational organizations that we have spoken to experience unforeseen people and HR challenges in five key areas: cultural, legal, employee motivation, cost models and governance.
Cultural differences between local and HQ countries are perhaps the most pronounced, and yet most underestimated, challenges that multinational shared services organizations face:
- In Europe, there is a range of decision-making styles. While the British, Irish and Finnish approach will be familiar to American business leaders, approaches with an increased focus on consensus-building and extended consultation timescales, such as those used in Sweden and Germany, will be new experiences.
- Employees in both service center locations and served countries will expect different treatment and communication levels from their organization. For example, Indians typically like to receive instruction— consultation may be perceived as a sign of management weakness; whereas Western Europeans want to be engaged in a discussion about the best way forward, and would likely reject anything imposed upon them.
- The approach to business etiquette can be different, too. For example, in the Middle East a handshake indicates that the process of negotiation has begun, as opposed to the widely held Western belief indicating that the deal is complete.
- Language differences are an obvious challenge, and can result in emotive reactions when handled incorrectly. One Belgian organization was shocked to find out that their service center worked only in Dutch (Belgians also speak French and German), as was a Swiss client, whose recruitment service was not delivered in the Swiss version of German.
Shared services leaders would do well to take the time to understand these issues and engage with their local colleagues. They should also research the people that they are working with, for example by reading the work of Geert Hofstede, first published in the 1970s, which identified cultural norms across more than 70 countries. And for anyone dealing with the English, we often give our non-British clients Kate Fox’s book, Watching the English - an anthropologist’s view of how the English behave!
Legal challenges are among the most predictable for an organization to face when setting up globally. Yet, even though it is well known that each country will have its own legal framework, too many organizations fail to prepare adequately.
U.S.-based executives need to learn the hoops they have to jump through in order to get things done in Europe. The legal requirements for country-level and European-level consultation have to be understood and factored in before embarking on a program. For instance: all major business changes that result in employee severance, site closure or outsourcing need to be managed through a consultation process with an elected works council.
To complicate matters, European legislation is inconsistently applied. A majority of European employment law is based on European Union (EU) Directives, but implemented through country-specific legislation, case law and precedent, which gives rise to some unexpected differences. For example:
- Local interpretations of the Acquired Rights Directive will dictate what is done when transferring services through outsourcing. It governs employee rights to things such as continued employment, continuity of service, continuity of compensation and benefits and the right to consultation. But because each country has a different set of rules, it can be a minefield for any multinational organization to navigate.
- Local interpretations of the Working Time Directive dictate how many hours people can and will work, along with mandatory rest breaks–in France it is 35, in others it is up to 48 hours per week.
- Notice periods and severance payments vary by country–in Germany, notice periods for long employment can be statutory and up to seven months.
- Many European countries require organizations that are making people redundant to prepare a social plan, setting out the steps that they are taking to reduce the social impact of the change. This can include taking measures to preserve the employment of the more long-serving (and often more expensive) employees.
Key to making this work is to understand the intent behind the legislation, work with that intent and plan well ahead of any change with a realistic timetable. If the legislative environment is understood at the start, it can help to make the changes more sustainable.
Employee motivation framework
Employees are motivated in different ways. Companies establishing multinational shared services centers should review their motivation frameworks to create an approach fit-for-the-purpose of managing their services center team. This may result in changing some established practices:
- Having more career levels or salary points than would otherwise be usual, so that a relatively young and ambitious workforce can achieve early promotions. It is common in Indian service centers to be promoted within the first nine months.
- Providing free language training after work to service center staff in Eastern European locations, even if it is not related to their work.
- Becoming active in the local community by supporting charities and events. This is important for organizations with a limited employer brand as a way to establish themselves as a preferred place to work.
And then there are the hygiene factors; making sure that demotivators do not become the biggest story in town. Pity the organization that gets the recognition of key religious events/holidays wrong or makes all company communications have a parent country slant, humor or style.
The motivation framework and hygiene factors for each workforce will be different. They have a cultural and legislative dimension, but also reflect the age, experience and education level, aspirations and personal status of the employees. Each service center leader should create a tailored local workforce and motivation plan for their team.
Another surprise that organizations encounter is that the standard costs assumed in business cases rarely materialize.
- The salary uplift to take account of benefits and social security costs varies from country to country, making a full-compensation analysis important. For example, Swedish people have much higher social security costs than the Dutch.
- There is also a need to understand the impact of skills on the cost of resources. In Eastern Europe, some expertise carries a premium that can dramatically drive up cost rates (by up to 100%), such as Dutch, Swedish, Finnish and Norwegian language speakers. Specialist roles, which require professional qualifications, like tax managers, have a relatively common cost across the EU, so expected savings in Eastern Europe often do not materialize.
- In setting up a multinational services center, there will also be expatriation and relocation costs to incur. The average cost of an expatriated employee is 300% of that in their home location.
These differing costs reinforce the need to analyze fully the total cost of the solution and be realistic about the total benefits that will be achieved.
Finally, you cannot assume that someone who has successfully managed a local shared services team will be successful working multinationally. It takes a different kind of relationship to manage, by conference call, a team that you meet every six months, from managing one that you see every day by walking the floor. Leaders that do not understand this can either fail to raise their game, or burn themselves out on airplanes.
It is important to set up the right governance relationship between an HQ and its distant services centers. One organization established its India-based services center for U.S. customers as an extension of its U.S. operation. Every person in the Indian service center had a direct line reporting relationship to someone in the U.S. Naturally, the U.S. “supervisors” could not cope with the requirements of the hiring process. The company learned the hard way and changed its governance model to one which, although captive and internal to the company, operated like an outsourcing relationship. The Indian leadership soon were managing directly, which allowed the Indian operation to flourish and take on additional work in a controlled manner.
All of the points outlined are pitfalls that others have fallen into. They are relatively easy to recognize with hindsight. However, there is an economic reality, too. If your shared services operation caters for every cultural and social eccentricity, then standardization and cost savings will never be achieved. Key to resolving this is to take the time at the start of the project to listen, plan and discuss. Document the assumptions that you are making and create a framework for accommodating people and HR issues into the plan. A small amount invested at the start to understand the perspective of others will pay dividends later.
Tim Palmer is a member of the PA Consulting Management Group. He is recognised as one of Europe’s leading sourcing consultants. He has worked with many European multinational companies to help them transform their HR functions. Tim is a board member of the HR Outsourcing Association, Europe and is Chair of the Standards and Benchmarking Committee. He was named Outsourcing Professional of the Year (2007) by the National Outsourcing Association.
Huw Watkins is a Managing Consultant with PA Consulting. He has led Global, European and Country HR teams through strategic HR, outsourcing and shared services implementations. Huw previously worked with the Gillette Company where he led the implementation of HR shared services across multiple geographies. Huw has extensive experience working in and leading HR change programme across Europe, the United States and the Middle East.