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on Thursday, 28 July 2011
in Business in China

Operational Audits: The soonest spoken, the quickest mended

Operational Audits are an increasingly important area. This thread relates to why they exist and how they benefit companies. An Operational Audit is a means of reassessing an existing company with a view to finding its weaknesses and then helping it become more lean, profitable and efficient. If the company is markedly distressed, an Operational Audit is likely to lead to an Operational Turnaround. At this point, interim management may be required (discussed later).

The Painful Truth of Operating in China

Why do Operational Audits exist? Regardless of the format of the company - be it a JV, a WOFE, an FIE or any other blasted acronym - a disproportionate number of companies face problems and resulting profit losses. Many of these problems can be ascribed to a lack of talented employees, but a great deal of problems derive from management issues. However, few entities and their CEOs wish to admit that they might have problems until the last moment when it is too late. When the threat of liquidation appears on the horizon, the first place one finds the manager is most likely in a law firm, attempting to wind up the company.

Operational Audits exist to prevent further losses by targeting a list of factors, from working out whether employees are being paid the right amounts, to supply chain management. They then assess where improvements can be made.

Triggering factors for an Operational Audit - Changes

Leadership Changes in management are arguably one of the best times for an operational audit. An assessment will provide up-to-date and impartial information, thereby helping new management/personnel learn the strengths and weaknesses of the company. But more importantly, an Operational Audit can provide an opportunity for changes in strategy or direction at a critical time.

Profit declines

Aside from changes in management, decreases in profits should provoke an Operational Audit before blips becomes steep descents into liquidation. An Operational Audit will attempt to pinpoint the source of such profit losses and whether they can be ascribed to the market place (for example suppliers charging more or customers paying less) or internal issues such as over-employment or failures in reporting problems.

Rises in Profits? Upsizing and Streamlining

Rises in profits are unlikely to provoke the average company to seek an operational audit. Fear of profit loss is certainly a more effective incentive to reassess. And yet, a rise in profits is usually followed by upsizing. Such upsizing can benefit from an Operational Audit in order to find out the best method of upgrading existing systems and cutting out redundant processes, rather like reassessing the foundations of a house before one builds an extension.

Excessive personnel

This is perhaps one of the most common issues in China; companies often report that profits decline while staff increases and funds are absorbed by over-employment. Nepotism is frequently the cause. Relatives who are under qualified and inexperienced are towed along at great expense. A recent BBC documentary uncovered such symptoms – factories made no progress where managers hired relatives to run them, but large offices were expensed and the foreign owners were rightfully furious, but powerless until they fired everyone and started again. Such issues are commonly found in young SMEs and start-ups due to their vulnerability. Companies specialising in

Value of Personnel

Operational Audits have been employed to assess the real value of such employees, by carrying out subtle and systematic interviews and research. The result - Operational Audits aim to separate those who are necessary and those who are dead weight, so that a company can achieve the same results or better, with fewer drones.

Remote Controlled Syndrome - Reporting issues

Frequently, people are overpaid for simple tasks and underpaid in other areas such as sales. We are unaware of what is going on! Who controls what? Such a question is crucial in remote controlled entities where the mother firms have little idea of what is going on on-site. People point fingers in an attempt to absolve themselves of responsibility. In the absence of clear reporting and processes, few employees will do more when they can do less. Instead, they take short-cuts and this leads onto the next issue.

Compliance

The legal system in China is opaque and fast-changing. Companies require protean adaptability in order to survive in the fluctuating marketplace. Non-compliance is an issue, which undermines many start-ups as well as long-established companies. Financially, companies complain that they had healthy reports when in fact real figures were hidden. Pulling the wool over the eyes of a company is surprisingly easy when no one is watching. This is not an attempt at scaremongering. Unfortunately, it is something both companies as well as law firms have seen time and time again.

Operational audits are therefore fundamental to reducing risk, by not only informing the company of the consequences of non-compliance, but actually suggesting ways of implementing efficient systems to ensure compliance.

Communication

Perhaps one of the most important aspects of a company is the method of reporting finances, projections, losses, faults and so forth. The lack of such a system will inevitably lead to a lack of cohesion and direction in the company. But it is often difficult to elicit clear, detailed responses commensurate to the level of responsibility; the Chinese have an expression: “The more you say, the more mistakes you make.” There is a worrying lack of clarity in reporting by Chinese entities of international companies.

Audits simply evaluate the lines of communication by emphasising the importance of reports - it therefore touches on compliance, 'remote controled syndrome' and the value of personnel.

Impartiality

Finally, Operational Audits provide independent and impartial evaluations. Such insights are invaluable for companies in an immature market such as China where it is often difficult to compare one’s model to another, due to a lack of knowledge of competitors. An impartial evaluation by a company with knowledge of the market and exisiting contacts has the benefit of new eyes and distance. Nonetheless, while a review may be given, it is inevitably up to the top dogs to implement change and this is half the battle.

Take note, an Operational Audit is cheap, quick and painless. A turnaround however is the stage every company wishes to avoid. When in doubt, be safe –get a quick and painless health check. PTL Group has carried out a number of audits as well as successful turnarounds. We have found that the saying holds true: 'The soonest spoken, the quickest mended.'

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