A shortage of leadership talent is the greatest obstacle Fortune 500 companies face as they seek to operate on a global scale. McKinsey research shows that most companies have identified rich opportunities created by the globalization of markets, the opening of formerly closed economies, the ability to arbitrage differences in skill and productivity from one region to another, and ready access to a vast pool of capital. But companies also recognize that so long as they do not have enough talent, their reach will continue to exceed their grasp of these opportunities (Exhibit 1). In a world of intensifying competition for human capital, a strong global talent pool has become a strategic asset and one of the few sources of sustainable competitive advantage. As John S. Reed, Citicorp’s chairman, once commented, "Our global human capital may be as important a resource as, if not more important than, our financial capital."

For most companies, expatriate managers are the cornerstone on which international ventures are built. Once the deals have been signed, the last toast has been drunk, and the corporate jet has left for the return flight to North America or Europe, it is the expatriate managers who stay behind to get the new business up and running.

These expatriates are among the scarcest and most expensive resources of multinational companies; salaries and benefits can easily run to more than $500,000 a year. They also play the critical role in the process of transforming opportunities into thriving businesses by transferring (typically from the company’s home base) the required institutional resources, technologies, and know-how; by building country-specific knowledge and relationships; and by developing the local talent that is the key to long-term success and profitability.

Clearly, however, companies have not given enough thought to the problem of helping this critical resource to succeed. Failure rates for overseas postings can run as high as 70 percent and typically range between 15 and 25 percent; furthermore, companies often see their successful expatriate managers leave for other opportunities. As a result, costs rise and international growth slows.

In this article, we focus on approaches to establishing a first-class cadre of expatriates and on the problems that arise when companies attempt to do so.

Building local operations and transferring skills

Although most companies agree on the need to develop local talent for running international operations, expatriate managers will long be with us. Even leading global companies that have substantial local management resources use expatriates extensively. Shell, a truly global company, has as many as 5,600 of them, in more than 120 countries.

Expatriates are important for sustaining international growth because the development of new businesses requires companies to transfer their skills, and expatriates continue to be the most effective means to that end. In emerging markets, where establishing relationships, adapting to local cultures, and transferring skills and technologies all take a lot longer than they do in developed ones, the need for expatriates is particularly pressing, even when a joint venture is the chosen entry vehicle. As a survey of ten Chinese joint ventures demonstrates, the number of expatriates required to run such operations does not necessarily go down even after three years, the period in which many companies expect to have established freestanding operations (Exhibit 2).

Given the duration and breadth of the challenge, it is not enough to focus, as so many companies do, on securing technically skilled expatriates for short-term assignments. The most successful multinationals instead select and dispatch people who know how to build foreign businesses—bringing in technical experts when necessary and weaving together their contributions.

Expatriates represent a significant investment. Their annual salaries and benefits differ markedly from one company to another, but the cost of a senior manager—such as a general manager, a chief financial officer, a national sales and marketing executive, or a national human-resources director—can run well over $500,000 a year (Exhibit 3). Colgate-Palmolive estimates that expatriate managers cost 50 percent more than their US counterparts even in relatively cheap areas, such as Latin America, and as much as 300 percent more elsewhere.

In view of the increasing demand for these managers and the substantial cost of supporting them, it is important to get expatriates right. But it is also very difficult. Perhaps 15 to 25 percent of all international assignments end prematurely.¹ Failure rates among US expatriates are particularly high, while those of Europeans are much lower. (The better failure rate among Europeans might be explained by several factors—for example, the more extensive cross-cultural training of expatriates undertaken by European companies and their longer history of doing business abroad.) These rates rise significantly in developing countries, where they can reach 70 percent.²

The impact of such fiascoes on a company’s reputation and momentum can be significant: relations with stakeholders may be damaged and customers lost, and many candidates for international postings may reject them for fear of failing. Moreover, the direct cost of each failure can easily reach $1 million—including time and money wasted in selection, visits to the location before the executive takes up an assignment, training, and relocation. Furthermore, unsuccessful expatriate managers can suffer major career setbacks and therefore a loss of self-esteem and self-confidence.

Leading multinationals take this investment seriously and strongly emphasize finding, developing, and retaining expatriate business builders. Such companies apply a combination of conventional and innovative approaches: unlocking their internal supplies of best talent and breaking limiting mindsets to cast a wider net. They also try to increase the odds of success by carefully choosing qualified candidates (and families) and keeping those candidates well connected while maintaining a healthy pressure to perform. Finally, they maximize their return on investment by keeping attrition rates under control and by using returning expatriates to best advantage.

Unlock the best talent

No one likes to lose valued team members, so business leaders often hang on to their best candidates and refuse to send such people abroad. Rigorous performance evaluation and incentive systems created for domestic operations are the root of the problem: companies evaluate the heads of domestic business units mainly by assessing their performance, so those executives resist serving up (and will even attempt to hide) high-performing candidates.

Such behavior impedes international expansion and limits development opportunities for top candidates. Multinationals must bring forward, not just sufficiently good people, but the very best: high-potential men and women who are committed to coaching local talent and have developed the credibility and organizational networks needed to access the right resources and get things done.

To unlock these people, the essential requirements are strong incentives encouraging managers to identify them, well-tuned HR processes, and attention from senior managers. Indeed, some multinational corporations have instituted formal mechanisms to ferret out promising candidates for postings abroad. Procter & Gamble, aided by an on-line database, identifies the competencies a given overseas assignment demands and seeks the best internal person for it, instead of merely accepting someone who wants to go. Other multinational companies use quid pro quo arrangements: they ask the heads of home-based business units to present their top ten performers and to let one or two go for international postings. The vacated positions are "backfilled" by drawing on the company’s strong management bench.

Family issues rank among the leading problems impeding international mobility

Other multinationals go the extra mile by dealing with family issues that impede mobility, for these rank among the main problems making it hard for leading-edge corporations to staff their fast-growing international operations with top talent. According to a 1994 National Foreign Trade Council survey, 80 percent of employees who refused international assignments did so for family reasons. In a survey of more than 11,000 expatriates and their spouses, Shell found that the two main factors blocking international mobility were the reluctance of spouses to move and concerns about the education of children. The problem will become even more acute as the demand for global talent intensifies and the number of dual-career couples increases.

To break down these barriers, leading multinationals are implementing a range of policies to help spouses before, during, and after expatriation (Exhibit 4). Shell and Colgate-Palmolive have set up comprehensive spousal-assistance programs, including in-house counseling and job-searching services and significant financial assistance for spouses wanting to go back to school or start a business.

Source creatively

Very few multinationals have the luxury of a large corps of mobile and experienced expatriate managers developed through many years of operating in foreign markets. Even leading companies with big talent pools must continually refresh and broaden the supply to sustain their advantage by going beyond the talent pools at hand and sourcing creatively.

Experienced multinationals, recognizing that softer skills and certain personal characteristics are particularly important in emerging markets, develop the technical skills of those candidates who have high intrinsic potential. These skills—which are in short supply at many companies with global aspirations—include the ability to handle foreign governments, to build deep networks of relationships, to negotiate and manage across cultures, to develop and coach local managers, and to find creative ways of circumventing underdeveloped market infrastructures. Furthermore, global market pioneers must have a particular mindset. A McKinsey study of 59 senior multinational managers in China identified a number of attributes that characterized successful expatriates: optimism, drive, adaptability, foresight, experience, resilience, sensitivity, and organization (Exhibit 5).

Samsung, for example, sends employees who have high potential and the right intrinsic qualities to university to develop the required expertise in international patent law, finance, and other specialized fields. To less experienced multinationals, this policy may seem counterintuitive, but the lesson is clear: don’t select candidates on the basis of functional expertise alone.

Another conventional approach involves reaching out to external sources of talented people with closely related industry experience. Often, they are expatriates poached from competitors that failed to use them effectively. Even multinationals, such as Gillette, that have strong internal-recruiting cultures are prepared to parachute high-priced external executives on a just-in-time basis into global operations. If these candidates are not sufficiently familiar with the business of the company posting them, they must be put through an accelerated development program before they go off to head local operations. In the mid-1990s, when Sara Lee Corporation was having problems integrating its international acquisitions, it went outside, hiring experienced managers as global marketing consultants to operating groups. These newly created senior positions were designed to give new hires a rapid 18- to 24-month orientation before they were sent out to lead international subsidiaries.³

In addition to these techniques, multinationals must often try more innovative approaches. One option is to build the required bundle of skills by using a number of people. Nortel typically sends three expatriates to start operations in emerging markets: an expert in international finance, an entrepreneurial sales manager, and a line manager with the softer skills required to handle relationships. France’s Carrefour develops stores in new emerging markets by sending in a team that stays on site until the operation is on its feet and then moves on to another new site. And when Procter & Gamble was building its Chinese operations, it dispatched a team of high-potential people (from market research, logistics, and marketing) who spent three years in that country.

Other multinationals, moving away from the assumption that their expatriate managers must come from their home countries, are looking at sources like nationals of developing countries, including employees of their joint ventures. At Gillette, only 15 percent of the company’s expatriates are natives of the United States; 85 percent come from the other 27 countries where the company operates.⁴

Finally, some multinationals, such as ABB, cleverly insist on the right to transfer top talent from one joint venture to others. Trained managers who have demonstrated their ability in difficult situations—building distribution systems in markets with poor infrastructure, for example, or starting up operations in tough emerging markets—may well replicate their successes in other emerging markets. At one major global bank, the leading expert on getting office automation systems up and running in new countries originally came from one of its joint ventures in the Middle East.

Early-assessment programs

About 70 percent of failed assignments result directly from personal and family difficulties rather than incompetence on the job,⁵ so most experienced multinationals have early-assessment programs that solicit the feelings of spouses and weigh family-related issues. Nortel’s selection program, which starts by assessing employees and their families, screens candidates against a list of known personal and family risk factors and encourages inappropriate candidates to decline international assignments. PepsiCo gives its employees a special test to assess their adaptability to life and work in foreign cultures.

But such programs can be effective only if employees found to be unsuitable for foreign assignments don’t suffer professionally. Although moving abroad may be difficult for some high-potential people, they may nonetheless be able to derive international experience from creative job design and exposure. A company could, for example, pair a high-potential manager from headquarters with an executive located in a foreign market. As John Fulkerson, vice president of organization and development at Pepsi-Cola International, puts it, "We don’t have a penalty box. There are lots of ways to have a great career."⁶

Anyone who relies solely on English will not be able to tap into valuable resources of information and influential business networks

Most multinationals also recognize the importance of investing in education—cross-cultural and language training—to prepare expatriates and their families for the move. Developed and developing countries can have vastly different cultural and business expectations. Anyone who relies solely on English as the worldwide business language will be unable to tap into valuable local sources of business information and influential business networks and can have only a limited ability to conduct negotiations.

Training must go beyond a few days spent in classrooms discussing the host country’s history, politics, economy, and culture. The duration of the overseas assignment and the difficulty of making the adaptation to the host country should determine the length of the training period and the level of immersion, from classes at home to foreign travel. Although it may be hard to quantify the benefits of these educational investments, the benefits are real. S. C. Johnson & Son attributes its low expatriate failure rate (less than 2 percent) to the cross-cultural training received by the company’s international workforce. Experience also shows that Japanese and European expatriates, more of whom receive more cross-cultural training than do their US counterparts (57 and 69 percent, respectively, as opposed to 32 percent), had lower failure rates in international assignments (an average of 1 in 15 for the Europeans versus 1 in 3 for the Americans).⁷

A less conventional approach to preparation involves identifying potential candidates early and either giving them short-term foreign assignments or getting them involved in negotiations with foreign business partners and government officials before making the decision to post them abroad. That approach may require an extra investment up front, but the return is worthwhile; seeing candidates in action is one of the best ways for senior executives to evaluate their fit and potential. Furthermore, early participation offers candidates a unique development experience: they can familiarize themselves with local living conditions and business environments, start developing critical relationships, and influence key strategic and operating decisions. All of this promotes a greater sense of "ownership."

Keep expatriates well connected

Top-performing multinationals not only demand superb performance from expatriate managers but also accept some responsibility for ensuring that their families are happy in the host country and that the expatriates themselves remain well connected to the organization and enthusiastic about their career development. All three are prerequisites for success.

To minimize the risk of failure, experienced multinationals start by providing basic personal support for expatriates and their families. Nortel, for instance, works with external suppliers to provide ongoing remote and local counseling services to employees abroad. Some multinationals even invest in specialized in-house resource operations: Honeywell has a Global Leadership Center that provides workshops, mobility assistance in the form of an information hotline, language training, welcome packages, and global forums.

Multinationals must also institute connectivity mechanisms to make expatriates feel well anchored in the broader organization; otherwise, they can easily feel "out of the action," lose motivation, and start looking for more involved employers. To prevent this kind of professional isolation, Samsung assigns each expatriate a senior home office mentor who periodically touches base to provide news about events in the home country and the head office, as well as career advice. Coca-Cola’s expatriates move from one international assignment to the next but maintain strong connections to their mentors at the Atlanta headquarters.

Efforts to keep expatriates well connected play a very important role in facilitating the two-way transfer of knowledge

These efforts to keep expatriates well connected also play a very important role in facilitating the two-way transfer of knowledge. Once expatriates have gone abroad, they must be able to locate expertise, best practices, and resources throughout the company and to transfer those assets to operations in the host country. Back home, the company must be able to assimilate the knowledge expatriates have picked up overseas. To open up these channels, such leading multinationals as ABB consciously promote formal and informal networks across markets through global conferences, special projects, and cross-country task forces. Eli Lilly uses its corporate intranet to stimulate communication among expatriates in different markets, with the ultimate goal of enhancing the company’s problem-solving abilities and building a culture of trust and support.

Support and encouragement, while essential, are not enough: leading multinationals are careful to maintain a high (but not unhealthy) level of pressure on expatriates to keep them motivated. Setting clear targets for managers and monitoring their performance are no less important in emerging markets than in domestic ones. But someone who is trying to build a business from scratch abroad should not be judged by the same criteria as a colleague who is extending and optimizing a core business at home.

Metrics must be in the "line of sight" of expatriates—that is, under their control—and simple enough to let them understand the effects of their actions on the evaluation. Such simple performance metrics as the growth of sales or volume, the number of new accounts, or specific milestones in developing local businesses, for example, are often more appropriate than metrics based on profits or option-pricing schemes that sound good but are often overly complex. If companies expect their expatriate employees to originate new businesses, they can add such measures as the number of deals that actually end up doing so or the number of deals that are in progress.

How well expatriates score will depend to some extent on the duration of an assignment. Managers need clear deadlines to spur their performance, but not such tight deadlines that they have no time to achieve significant results. Balancing these two considerations isn’t easy. Coca-Cola does not repatriate managers until they have had a chance to show that they have made an impact—three to five years, depending on the country and the assignment. This kind of performance monitoring serves as a great motivator, but to be inspired, managers require something more. McKinsey’s study of 59 senior managers of multinationals in China clearly demonstrated the benefit of frequent visits by chief executive officers. On average, the CEOs of the ten most successful companies (reckoned by market share, revenue growth, corporate position, employee morale, and profitability) made 2.2 trips a year, while those of the less successful ones made only 1.7. More than 70 percent of respondents found these visits to be a very powerful motivator (Exhibit 6).

Prevent the leakage of talent

Leading multinationals never forget that expatriates represent a significant investment and strive to keep them and to capitalize on their experience. To ensure that valued employees are not lost, companies should make careful planning for repatriation a priority. Too many of them now fail in this task. Upon returning to domestic operations, expatriates often discover that during their absences their counterparts have passed them by. Others return to jobs that do not use their new skills and find themselves with reduced autonomy and compensation.

One survey found that 91 percent of respondents felt that their companies did not value their international expertise

A survey by the US Bureau of National Affairs, a government organization, found that 68 percent of managers were unsure of their next positions before returning, 77 percent believed that they had been demoted upon repatriation, and a stunning 91 percent felt that their companies didn’t value their international experience. As a result, repatriated managers in the United States leave their companies at twice the rate of managers with purely domestic experience; about 25 percent of them leave within one year of returning. This wastes valuable resources. Systematic repatriation planning that rewards and exploits the returning expatriate’s skills and experience is the key to preventing this talent drain. Komatsu has a "return ticket policy": an assurance that the company views international postings as a broadening experience, not as a trial, and that returning expatriates will have positions waiting for them in Japan. At some multinationals, such as ABB, sponsoring managers are responsible for finding them new positions—a process that starts about six months before the conclusion of an international assignment.

Often, "reverse culture shock" provokes an expatriate’s decision to leave a company upon returning to the home country; the Bureau of National Affairs found that 69 percent suffered from this syndrome. To control it, Monsanto offers repatriation-training programs for expatriates and their families. In what amounts to a warm corporate hug, the program addresses the expectations of returning expatriates for reentry and gives them an opportunity to showcase their new knowledge in a debriefing session. Multinationals must not only preserve the expatriates’ loyalty but also engage them in the process of preparing their replacements, so that their know-how, experience, and networks are not dissipated when they leave their foreign operations.

Samsung, for instance, has learned that returning expatriates can give candidates preparing to go overseas a dose of reality and make their preparation and training more credible. Moreover, leading multinationals take advantage of the knowledge of returning executives and cultivate their networks of contacts by arranging to keep them involved with their former foreign operations, even when they have been promoted to new areas of responsibility.

Organizations hoping to extract value from the gaps in skills between emerging and developed markets will need to rely on expatriates for some time. But these people are a scarce and very expensive resource and, unfortunately, they often fail. To maximize the return from international expansion, multinationals must take their investment in expatriates more seriously. They must free up their best talent by reducing barriers to mobility within their organizations and across geographical boundaries. They must raise the odds of success through better screening, preparation, and connectivity. Finally, these companies must improve the internal transfer of knowledge by encouraging communication and retaining expatriates after their foreign tours of duty have ended.