For many companies, expanding internationally has become less an option and more an imperative.
Moving overseas can open new revenue opportunities for companies bumping up against market share limitations in their home country. It can give new life to mature products that have reached the end of their lifecycle in their home market, but could still be competitive in another.
By quickly beating competitors into a new territory, companies may also be able to capture and benefit from first-mover advantages.
Beyond seeking to tap new markets, companies increasingly are looking offshore for talent. Technology now makes it possible to field a workforce every bit as distributed as their supply chain. Employers can now access the best employees they can get, wherever they may be found— and in some cases, no matter where those employees want to work.
Pursuing and achieving these goals can be exhilarating. It also can be fraught with challenges—especially for companies unaccustomed to navigating the legal, regulatory and cultural terrain of an unfamiliar locale. Indeed, in a new survey of senior finance executives working at companies where expansion abroad is part of their long-term strategy, 51% report that legal, HR, or tax compliance challenges have been a substantial barrier to implementing their international strategy.
The list of challenges can be daunting, no matter how high you’re aiming. An organization hiring a lone sales representative in, say, Ireland, must negotiate the same sort of legal and cultural challenges facing an organization that’s staffing a ten-person distribution center in Brazil or a 200-employee production facility in Vietnam.
Even past experience and success in one country cannot ensure success or speedy results in another, since laws and cultural norms can vary tremendously from one geography to the next. In the U.S. vacation time is offered at the discretion of the employer. But in many countries, there are statutory agreements that provide employees with paid time off—as well as salary increases, profit-sharing and bonuses. In Mexico, federal law entitles employees to a Christmas bonus equal to 15 days of normal pay, which employers must pay by December 20 or risk fines. Companies that fail to adhere to these norms can find themselves in trouble with both local governments and employee expectations.
The list of responsibilities companies assume when expanding international is long as well. Just on the legal andregulatory front, hiring even one overseas employee can require setting up a subsidiary or regional presence to act as the employer of record, registering with tax authorities, opening local bank accounts, acquiring local commercial certifications, and administering payroll and employee benefits in accordance with local laws and regulations. Typically, organizations will need to hire local accountants and attorneys to ensure compliance in all these areas. Depending on the country, it could take three to 12 months to establish a foothold.
A problematic alternative: contractors
Some companies look to skirt these issues by setting up international employees as contractors rather than employees. But this can be complicated, right from the start.
Is the person being “hired” actually the best person for the job, or are they simply the best person willing to work as a contractor? In many countries, true employees are eligible for significant government sponsored benefits that many good hires would be loath to give up. Japan’s public health care system is a good example; it’s so well-regarded that private alternatives are scarcely available—a real deterrent to any Japanese citizen contemplating working as a contractor. Australia highly rated pension system is another employee perk workers would be reluctant to forfeit. It includes a feature known as the Superannuation Guarantee in which employers must make a retirement account contribution for each employee equal to 9.25% of their ordinary earnings.
In some countries, employers also must be careful to ensure that contractors, by virtue of their responsibilities, aren’t actually employees entitled to the rights and benefits associated with that status. Misclassifying contractors as employees can lead to fines and other penalties.
The global EOR solution
Given the HR challenges as sociated with overseas expansion, it’s not surprising that many companies are turning to an alternative model in which they outsource the international employment process to a third party specializing in that work. This third party, known as global employer of record, or EOR, serves as the employer of record for their client’s employees in a foreign country. An EOR can handle recruiting (or simply onboarding of the client’s chosen candidates), take care of payroll, and offer benefits packages in line with local requirements and expectations. The EOR assumes all responsibility for compliance with legal requirements, and its on-the ground presence ensures that it’s in touch with the local employment culture, too. Top global EORs can handle assignments ranging from setting up a single employee to staffing an office or facility requiring hundreds or more employees.
In the new survey of senior finance executives conducted by CFO Research, 58% of the respondents said their organizations already engage a global EOR to support their international business strategy or plan to do so in the next three years.
This group includes 23% who are working with a global EOR today, and 19% who plan to do so within one year. What’s more, nearly all the survey respondents—94%—said a trusted global EOR can do a much better job of overcoming potential barriers to operating in a new country than a typical company can do on its own.
And 96% agree that its essential for CFOs to understand the capabilities of a trusted global EOR in order to fully inform enterprise decisions on overseas expansion.
Working with a global EOR can make extra sense for companies that haven’t yet settled on a long-term global strategy and are moving into a new country simply to test the waters. In that scenario, it could be hard to justify spending the time and money required to set up an offshore subsidiary. With an EOR, many of those expenses are eliminated. Companies can hit the ground running, fast—and pull out fast if the new venture proves ill-advised.
A broad range of benefits
The top perceived benefit of working with a global EOR is the assurance of legal and HR compliance, cited by 51% of survey respondents, followed by the assurance of being in regulatory compliance (42%) and the ability to leverage the global EOR’s local knowledge (40%).
In fact, many finance executives see using a trusted global EOR as a best practice. 83% agree that working with a global EOR is a best practice for relieving the management and administrative burdens of overseas business expansion.