In the past three decades, the technological gap between foreign and local goods provided enough of a competitive advantage to cover a serious lack of operational management and infrastructure in China-based foreign-invested enterprises, but this is no longer the case.
China is undergoing an “operational revival” of sorts, and excellence in operational management and infrastructure has become a top priority. Today, as China’s market is the business focus for many established players and new entrants.
One of the primary drivers for operational audits in China is that language and cultural barriers prevent China-based GMs from reporting accurate and comprehensive information about on-the-ground operations to a company’s headquarters. In fact, much of the information reported is not based on multiple sources, but rather a translation of the opinions of one local manager or partner.
Furthermore, developing internal “self improvement cycles” requires an openness to constructive criticism and multidisciplinary intervention that is uncommon among traditional Chinese managers.
An operational audit can help to fill the informational void and bridge cultural barriers in China to establish checks and balances and strengthen internal control. Pure financial or legal audits to assess internal control systems are insufficient, as these audits rely on data willingly submitted by the audited company. An operational audit is a key to the accuracy of such data in the first place.
Operational audits can uncover a variety of behaviors that can dramatically affect a company and will likely not be otherwise uncovered, including:
- Employees who signed perfectly legal labor contracts but are not fulfilling their job description (or, even worse, labor contracts for employees who simply do not exist)
- Production losses visible in the factory but not recorded in the books
- Company resource usage recorded in the books that does not happen in real life
Additionally, improved interdepartmental communications and improved management confidence are all by-products of an effective operational audit.
In this article, we highlight five lessons (all gained from operational audits) for establishing effective internal controls:
The Chinese labour market is a paradox of talent. Despite a large workforce there is a shortage of skills. The resulting excess demand for talent has created a seller’s market. Skilled locals have more employments options and are more likely to leave current employers if they feel dissatisfied. These employees seek career advancement, new challenges and opportunities. Employee retention poses a challenge to firms, with high turnover rate of around 20.8% and 21.8% in 2009 according to Hewitt China.
