Understanding China’s Next Wave of Innovation

MIT Sloan Management Review
Thu, 07 Feb 2019 14:52:28 +0000

In recent years, a handful of Chinese companies have emerged as global innovators and have garnered a lot of attention. This group includes online retail giant Alibaba, appliance maker Haier, search and data technology provider Baidu, and Tencent, the social communication and gaming ecosystem. These companies are challenging the R&D strategies of foreign companies to keep up with the pace in China,1 and they are providing valuable lessons on how to make ideas commercially viable.2 But there’s another, less obvious force to be reckoned with in China as well: thousands of innovative companies that are quietly disrupting numerous industries, overtaking incumbents, and developing new products and new business models. For a variety of reasons we’ll discuss here, these emerging innovators are not easy to identify — yet they pose real threats, often in unexpected places.

For example, Royole, a Shenzhen-based startup that develops electronic products capable of bending and folding, has entered the automotive market with a superthin flexible display that can serve as the interface of a car’s dashboard. Backed by an abundance of venture capital, Royole has also introduced the world’s first bendable smartphone, which can be folded like a wallet.3

By expanding the distribution of their products, some established companies are also catching multinationals off guard. One such company is Jiangsu Dongcheng M&E Tools, a manufacturer of power hand tools. In the early 2000s, Dongcheng operated at the low end of the local market and was not seen as a serious rival to name-brand competitors like Bosch and Stanley Black & Decker. However, today it is China’s best-selling power-tool brand, outselling Stanley Black & Decker 10 to 1 there, and it is competitive in markets all over the world.

Over the past decade, we interviewed hundreds of executives, entrepreneurs, and investors in China and studied more than 200 Chinese companies. Our goal was to understand how innovation is being practiced in China and how it is changing. We identified three types of Chinese innovators, each of which presents a different set of challenges for competitors. We refer to them as hidden champions, tech underdogs, and change makers. (See “About the Research,” and “Three Types of Emerging Chinese Innovators.”) We will describe them here in detail so companies seeking to operate in China or compete globally can see how each type of innovator conducts business and understand what multinationals may be up against in the future.

Three Types of Emerging Chinese Innovators

Innovative Chinese companies are posing real threats to non-Chinese multinationals by developing new products and embracing new business models.

Hidden Champions Tech Underdogs Change Makers
Definition Midsize innovators in niche markets Science- and technology-oriented ventures Successful new companies driven by digital innovation
Market Niche Niche Mass market
Experience Incumbent Newcomer Newcomer
Size Revenue < $5 billion Revenue < $60 million Valuationi > $1 billion
Examples Lens Technology, Shanghai Zhenhua Heavy Industries, Hikvision, Tecsun, Jiangsu Dongcheng M&E Tools Weihua Solar, Huiying Medical Technology, Malong Technologies Toutiao, Ele.me, Didi Chuxing
Challenges Posed to Non-Chinese Multinationals • Solid R&D capability enabling continual product upgrades
• Global players regardless of large home market
• More agile than Western companies
• Too many to count
• Cutting-edge technology, often science-driven
• Little or no media presence
• Hard to see them coming, often from other industries
• Digital business models applied to traditional industries
• User-centered; not product- or tech-driven

Source: Authors’ research

Hidden Champions

Hidden champions4 are highly specialized companies. Typically, they are among the top three players in their industries in China and globally. But in contrast to big-name Chinese companies that are recognized as market leaders around the world, they tend not to be well-known and their revenues are less than $5 billion. They are driven by a quest for long-term growth, and they pursue continual innovation in their respective niches in an effort to add value for their existing customers. We identified more than 200 hidden champions in various sectors, including machinery, chemicals, materials, and electronics.5

Companies in this category usually customize their products to meet the needs of global customers, and they are accustomed to using a rapid trial-and-error approach to testing the market, adjusting, and learning. Many of them are tinkerers: They develop products, identify new resources, test solutions, and then rebuild.

Consider Lens Technology, China’s largest producer of lens components such as sensor modules that are used in smartphone cameras. Founded by entrepreneur Zhou Qunfei, a high school dropout from Hunan province, the company began as a maker of glass screens for digital watches and then quickly recognized an opportunity to produce screens for flip phones for TCL, a major electronics company headquartered in the city of Huizhou in China’s Guangdong province. At that time, plastic was the industry standard material for phone screens, but Lens Technology sold TCL on the advantages of glass. On the heels of that success, in 2003 Lens Technology became a supplier to Motorola and began producing glass screens for its Razr V3 flip phone. Lens Technology now supplies screens to Apple, Samsung, and other smartphone makers.

Many of the representatives of hidden champions that we interviewed said they faced challenges in competing against much larger companies with significant technological and resource advantages. But we found that hidden champions worked hard to make up for their deficiencies by moving fast, continually updating their offerings, and keeping their costs in check.

Hikvision is another good example of a hidden champion. In 2002, the company launched a video compressor card for computers based on MPEG-4 technology; the next year it released a new set of products based on a new video compression standard. Hikvision typically upgrades its offerings multiple times every year, and it views that approach as a way to stay ahead of competitors and copycats.

One way hidden champions achieve cost advantages over Western competitors is through their recruitment strategies. Unlike better-known Chinese companies such as Haier and Alibaba — and, indeed, many multinationals around the world — they don’t focus on candidates’ academic pedigrees and instead concentrate on identifying people who will bring a certain attitude to the job. Rather than specifically recruiting graduates of top universities, they look for people who are happy to focus on improving product value for customers.

China’s hidden champions pose three big challenges to non-Chinese competitors. The first involves the way they think about technology: As they pursue continuous product innovation, they often create opportunities for themselves to expand their offerings or enter niche markets. Many of them have leveraged their R&D capabilities and their rapid growth in the domestic Chinese market to achieve global market leadership. For instance, Hikvision invests an average of 8% of its revenues in R&D, and about 47% of its employees work in this area of the business.

The second challenge for non-Chinese companies is the global competitive threat hidden champions pose. Even though they do business in a very large home market, most hidden champions look for ways to expand internationally within five or 10 years, but they pursue expansion in various ways. For example, Goldwind, a producer of wind turbines, set out to internationalize its technology and products by engaging in a research collaboration with Vensys Energy, a German wind energy company, before it established a subsidiary and started exporting products. For their part, Hikvision and medical equipment manufacturer Mindray Medical International chose to expand aggressively overseas by creating dozens of subsidiaries. Nearly half of their revenues now come from abroad.

The third challenge for non-Chinese competitors is how quickly hidden champions can make decisions and grow. Many became domestic and global market leaders in about a decade, significantly faster than competitors from countries such as Germany, Japan, and the United States. It’s dangerous for multinational companies to underestimate the speed with which these new competitors can emerge.

About the Research

This article is based on more than a decade of research, teaching, and consulting experience in China involving more than 200 Chinese companies. Between 2005 and 2017, we interviewed over 350 Chinese entrepreneurs, investors, and executives, focusing on the status and development of innovation competence at local Chinese enterprises. During this period, we also did extensive research on the growth of China’s digital ecosystems, participated in forums and conferences on innovation in China, and had frequent discussions with executives and innovation professionals from more than 50 Fortune 500 companies.

Tech Underdogs

Tech underdogs are small and midsize enterprises with revenues of less than $60 million. They use their intellectual property to create a stream of innovative products. Many of these companies were founded by people returning to China from overseas, having studied at elite universities in the United States and Europe. Our analysis suggests there are tens of thousands of such enterprises in China.6

Unlike innovators in Silicon Valley, Chinese entrepreneurs work collectively to innovate and push technology and market boundaries. Although many of the ventures aren’t able to survive, some become viable competitors and even market leaders. The large number of players in any given category in China increases the chances that at least one innovator will be able to break through.

In our research on the solar power industry in 2016, for example, we identified more than 150 Chinese companies with significant intellectual property in photovoltaic technology. Weihua Solar, for example, was founded in 2010 by three graduates of Tsinghua University. One of its founders, Fan Bin, received a Ph.D. from Switzerland’s École Polytechnique Fédérale de Lausanne, studying under one of the leading experts in photovoltaic cell technology. In 2013, Weihua Solar and German chemical company Merck entered into an agreement under which Merck agreed to supply advanced materials and gave Weihua Solar permission to use relevant patents. This partnership, in combination with Weihua Solar’s internal R&D efforts, has led to the development of a light, flexible solar cell that is more efficient than any other solar cell of its kind.7

Another notable group of Chinese tech underdogs is involved in artificial intelligence. By our count, there were more than 80 AI-driven health care ventures in China in the summer of 2018. One of them, Beijing-based Huiying Medical Technology, which was established in 2012, had built a smart medical-image cloud platform. It partners with schools such as Tsinghua University and Stanford University and collaborates with more than 800 Chinese hospitals to provide AI-assisted diagnosis and treatment support. Another tech underdog, Malong Technologies, specializes in advanced image recognition, enabling commercial equipment to use X-ray technology to see things at a microscopic level. This has applications in retail (for rapid merchandise checkout in unmanned stores, for example), manufacturing (in systems designed to detect defects), and security (for baggage scanning). In addition to being available in both public- and private-cloud versions, it can be embedded in a system or server appliance, which can operate without a public internet connection.

Like hidden champions, Chinese tech underdogs pose three challenges to non-Chinese multinational companies. First, the sheer number of ventures makes it difficult for multinationals to know which local companies represent a threat and which do not. Compared with their Chinese counterparts, multinationals based outside China tend to have fewer connections with local companies and investors; as a result, they are not part of the conversation about emerging threats.

Second, tech underdogs launched after 2000 tend to be based on cutting-edge technologies (more than earlier Chinese ventures), and the founders are getting more and more sophisticated. The companies are targeting increasingly advanced fields, including genetics, solar technology, AI, new materials, and agri-tech.

Third, many of them have little or no media presence. That lack of visibility can be an advantage that enables tech underdogs to catch established competitors off guard when entering new markets.

Change Makers

Change makers try to gain advantage from digital disruption. Many of them are funded with large amounts of venture capital. They operate in a variety of industries, including media and information, ride-hailing, and retail. Unlike hidden champions and tech underdogs, change makers are highly visible, and their ranks appear to be growing.

Toutiao, for example, which uses artificial intelligence to provide mobile customized news recommendations, is one of China’s most visible change makers. Founded in 2012 and supported by more than $3 billion in venture capital over several years, Toutiao distributes personalized information to users based on their stated interests and browsing habits in social media. Thanks to its robust funding, Toutiao has been able to provide coverage of topics not generally featured in the mainstream media. As long as it stays away from content that’s critical of the state or goes against state interests, it is able to disrupt state-controlled media, which tends to be less responsive to user needs. By July 2018, Toutiao had more than 120 million daily active users (a high percentage of whom were under the age of 30) and was valued at more than $11 billion.8

Due to the plentiful supply of venture capital financing in China (increasingly from foreign sources), there is no shortage of young people eager to start digital businesses. The online food-ordering service Ele.me, for example, was founded in 2008 by two students from Shanghai Jiaotong University who got hungry while playing video games at night. (The name Ele.me is inspired by the Mandarin phrase for “Are you hungry?”) Leveraging social media and aggressive marketing, they forged links with other young customers who wanted nighttime food deliveries. By 2015, the company’s revenues had surpassed $1 billion, and in 2018 it was acquired by Alibaba.

Like hidden champions and tech underdogs, China’s change makers pose three challenges to foreign multinational companies.

First, they often appear out of nowhere, sometimes drawing on experience from other industries. Indeed, nobody anticipated that China’s state-controlled media landscape could be upended by a company like Toutiao. But the founder used his experience in three previous roles — as an online travel agent, an engineer at Microsoft, and a builder of an online real estate platform — to think creatively about solving consumers’ needs for relevant media and venture beyond the industry’s existing boundaries.

Second, change makers apply digital business models to a wide variety of industries, such as retail, banking, and consumer transportation (which includes bike-sharing and ride-hailing services). Although China lags behind more advanced countries such as the United States in internet penetration, mobile internet usage in China is high.9 Being on-demand and mobile is no longer the standard just for internet companies. Increasingly, it’s what’s expected of companies in traditional industries too.

Third, unlike Chinese incumbents and established multinational corporations with legacy products and business models to maintain, change makers are entirely user-centered. Rather than pushing existing products, they continually engage with users through social media to adapt products and, as necessary, revamp their business models.

Lessons for Non-Chinese Multinationals

All three categories of emerging Chinese innovators include companies that are either competing globally or positioning themselves to do so. This raises obvious questions about how non-Chinese rivals should respond. Based on our research and knowledge of Western multinationals, we offer these recommendations.

1. Think beyond recognized industry borders. We found that the list of possible Chinese competitors goes well beyond the dozen or so players that international executives in any given industry might be familiar with. Although you need to identify your most likely competitors, you must also prepare for less-obvious threats from a variety of places.

Tech underdogs can be hard to spot because they are often small operations run by engineers with limited marketing experience. Hidden champions tend to be larger but are still typically less well-known globally than similar companies based in European countries.10 And though change makers may be highly visible within their industries, it can be tough to see them coming outside those traditional boundaries.

Take, for example, the Beijing-based ride-hailing business Didi Chuxing. When Uber entered China, it expected to do battle but failed to realize that Didi Chuxing was closely connected to the mobile payments businesses of Tencent and Alibaba and was therefore a complicated rival. Uber ended up selling its China business to Didi Chuxing for $1 billion in cash and a 17.7% ownership stake. In the tools business, Bosch made a similar mistake, failing to recognize that Dongcheng was a serious competitor — a blind spot that prevented Bosch from mounting a stronger challenge.

By proactively exploring unfamiliar corners of the competitive landscape, companies can improve their chances of spotting emerging trends and preempting moves by potential competitors.

2. Cast a wide net. Although traditional strategy and organizational theory stress the importance of focus,11 Chinese innovators remind us that casting a wide net when searching for opportunities can also pay off. In some cases, we found that the more organizations functioned as ecosystems (by partnering with and investing in external companies), the better they could respond to new opportunities and the challenges that emerged. For multinational companies, the key to exploiting this capability is to give Chinese subsidiaries more local autonomy than they might offer subsidiaries in other countries. That’s because it’s difficult to cast a wide net from far away — it’s unlikely that headquarters-based managers would have enough knowledge of the local ecosystem.

Many multinationals are accustomed to developing innovations internally, often in the R&D centers in China. Although it’s important for companies to pursue continual innovation internally, it’s also critical for them to invest in new ventures and participate in collaborations across the business ecosystem. That approach not only enables companies to expand their revenue streams but also allows them to stay abreast of customer requirements, competitive moves, and new wrinkles in technology — and adjust their business models accordingly.

For example, since being outflanked in the Chinese power tools market by Dongcheng, Bosch has made a concerted effort to connect with local ecosystems by organizing multiple incubator programs and investing in Chinese ventures. Bosch recently invested $15 million in a network equipment company and is developing an experimental smart factory in Chuzhou, where it will make appliances that exploit its internet of things technology. We have noticed an increase in such investments and partnerships by foreign multinationals in China. DSM, a Dutch specialty chemicals company, for example, recently acquired a Chinese photovoltaic component company. And Pfizer has developed partnerships with Tencent and Chinese insurer Ping An to run local health care business-plan contests. Such initiatives can be part of a company’s broader strategy to expand R&D efforts in China.12

3. Mind your home base. No matter how well-established companies may be in their own industries and home markets, they must stay attuned to potential competitive threats. To do that, they need to strengthen their knowledge of their home markets and understand how Chinese innovators might operate and innovate if they set up shop there. Companies should also explore changing customer needs and invest in new technologies and the digital transformation of their businesses.

Our recommendations point to ways in which non-Chinese multinational companies can more effectively compete against China’s emerging innovators. One thing multinationals should not do is walk away from what they do well. They should take full advantage of their core strengths, including their implementation capabilities, intellectual property, global talent pools, and operational experience. Rather than just trying to become “more local,” they should understand the specific challenges China’s innovators pose and develop strong countermeasures. Perhaps above all, they should study the way China’s innovators do business and rethink long-held assumptions about how to innovate successfully in China.

HBR.org
2019-02-07T14:00:15Z

Creative pursuits will open up new perspectives and boost your confidence.

2019-02-07T15:00:32Z

Small consumer brands are better able to create hypertargeted products.

2019-02-07T16:00:57Z

Budget time, not just money.

Business.com
6 Hacks to Boost Your Google Ads Conversion Rates
Thu, 07 Feb 2019 05:00:00 -0800

Pay-per-click programs, such as Google Ads, are becoming increasingly popular. They give small businesses the opportunity to advertise on the same platform as the big boys. PPC programs create a level playing field where your success is down to your effort and not the size of your budget.

However, PPC is not an easy way to make money. Because of the low barrier to entry, there is a lot of competition and to make a profit you need to test and hone your campaigns for maximum effect. Here are six ways you can increase your conversion rates on Google Ads. 

1. Never Forget Remarking

Do you track how many people click on your ads and add your product to their cart, but eventually decide not to make a purchase? There could be hundreds of reasons why these people decided to not purchase the product at the very last moment. You may never know the exact reason why. However, just because they have not purchased anything from your store, it does not mean that you should ignore them. Rather, target these people with r emarketing. Cook up a unique ad copy for these people based on their preferences and then create a remarking list and voila!

2. Don’t Ignore The Relation Between the Landing Page and Ad Copy

Sometimes people get carried away while writing ad copies for their Google Ads campaign. You need to understand that Google Ads use certain metrics and algorithms to determine the quality and relevancy of an ad before showing it to people in related search queries. This means your ad copy must contain those keywords that you are planning to target and also the landing page copy needs to contain those keywords as well. Otherwise, it will be very hard for the Google Bot to understand the relation between the search queries, ad copy and landing page. Moreover, it will be confusing for the visitors if they are unable to find any relation between the ad copy and the landing page. Imagine running an ad that highlights the importance of Digital Marketing but the landing page talks about the Importance of web design. It will be a total disaster. Conversion rate, in that case, will take a nosedive.

3. Ad Rank

We marketers get so busy writing compelling ad copy and tracking conversion that we tend to forget the elephant in the room, which is Ad Rank. Google Ads uses this metric to determine the position of an ad related to others. If you have stopped paying attention to Ad Rank, your ads will not get shown. There are a number of factors that determine Ad Rank and the most crucial of them all are the landing page experience, relevance of the ads, expected click through rate, searcher’s intent, nature of the search terms, ad extensions, auction-time ad quality and bid amount. Since Ad Rank gets calculated every time an ad gets qualified to appear in a search term, you have the opportunity to tinker with the ad copy, keywords or the landing page. By improving Ad Rank, you will be able to rank higher in competitive terms even without paying extra money. This will have a bigger impact on your business’s bottom-line.

4. Negative Keywords

The most outrageous thing that a Google Ad Specialist can do is not include a list of potential negative keywords while starting a campaign for the first time. You can’t reply on the search term report alone to get the list of irrelevant keywords. Rather, you need to be proactive and create a list of keywords that are somehow related to your ad copy but are totally irrelevant to your ad campaign. For example, if you are trying to sell ebooks, you need to mark terms such as "free" or "pirated" as negative keywords. Otherwise, a good percentage of your ad budget will be spent on irrelevant search queries and the conversion rate will take a serious hit.

5. Focus on Mobile Users

Love it or hate it, we simply can’t ignore the fact that mobile is seeing a major uptick and this trend is not going to slow down. When you are running an ad campaign, you need to have some extra provisions for mobile users. For example, don’t forget to use the Call Extension specifically for mobile users, and also don’t forget to calculate conversion rate from mobile devices in a separate sheet. Since people are using multiple devices to browse the web, you need to make sure that the landing page of your website is mobile friendly and it is not taking long time to load.

6. Get The Landing Page in Order

People tend to ignore the importance of landing page. They just plaster some images and texts here and there and feel it is okay. You need to make proper use of the "above the fold" space of the landing page. Include catchy lines and a Call to Action Button in that section and don’t forget to conduct A/B tests to figure out which version is generating more revenue. The content of the landing page must be concise, compact, conversion-oriented and catchy.

Include client testimonials and trusted seals to make your landing page look trustworthy. Otherwise, it will be really hard for you to improve the conversion rate.

Additional Thoughts

Only pause keywords once they have had at least a couple of hundred clicks and a handful of conversions. Before this figure is reached, you can’t really be sure how reliable it is. The longer you collect data, the more accurate the results will be.

Borderline Keywords & Data

If a keyword is borderline (e.g., the cost per conversion is $34 and the value is only $32) make a judgment call as to whether you should collect more data before pausing that keyword.

You should regularly be testing your landing pages and sales pages too. Doing this will improve your overall conversion rates and could, therefore, make previously unprofitable keywords profitable. If you run a successful split test on your landing page, it may be worth un-pausing previously borderline keywords to see if they are now profitable.

Just Keep Measuring

Using these stats, you can very easily see which are your most profitable keywords. Analyze them, see if you can use them to think of more keywords to add to your campaign, and then test those keywords too.

There are many ways you can bring down your costs, such as improving your ads or your website. However, using this six methods can help you make a profit quickly. As you accrue more data, you can improve your campaign and website, then gradually un-pause keywords.

Investor Ghosting: Why You're Not Getting the Second Date
Thu, 07 Feb 2019 06:00:00 -0800

When fundraising, founders often sound like disgruntled singles. They invest time attending meeting after meeting trying to raise funds or spread awareness, usually culminating in disappointing results. The worst is situation is when a founder is "ghosted" by an investor after what seemed like a great meeting. As in the dating world, investors will simply cease communication in an attempt to avoid an uncomfortable situation.

Why are founders getting ghosted by investors? Was it something that was said? Something they did or didn't do?

There are numerous reasons why an investor would back out of an agreement and the most common are listed below. Here are my tips for managing your fundraising process to avoid frustrating situations.

“Tinderize” your pitch 

Investors don’t have time for long, drawn out sagas. Instead, they want to get an immediate impression of you and your organization, then swipe right or left in an instant. Make sure you have a stellar elevator pitch that entices potential investors, and you will land that “first date” or first meeting.

Have a great “dating profile” 

Just like on Match or OkCupid, an investor will want to scrutinize your profile before a “date." You want to make sure you stand out from the competition. You should have a great teaser deck, one pager or an executive summary ready to go. Also, don’t forget to update your LinkedIn profile because that is usually the first place they will go to research you and your organization.

Going "all the way" on the first date? 

Don’t overload potential investors with too much data, facts and figures. Don’t have slides that are oozing with financial projections and bits and bytes of your technology. Keep it simple, clear and understandable so you can show your expertise and ability in your industry. Give them the opportunity to ask to see more and you might be headed for the desired "second date", which can take the form of a follow-up meeting, an introduction to their partners, working with a technical expert or some other due diligence piece of the process.

You’ve been ghosted, what now? 

Nothing is worse than getting ghosted after having an exciting meeting with a potential investor. Don't take it personally and try not to beat yourself up. Remember, it's not easy for investors to turn enthusiastic people away, especially if they would like to work with you in the future. Don’t be afraid to follow up with a promising lead. Elizabeth Yin, general partner at Hustle Fund, suggests following up with investors when you say you will. If you haven't heard from someone in three to four days, reach out to them again. If they still haven't gotten back to you, follow up with them in another three to four days. One helpful tip is to always include a call to action so they know what it is you want them to do.

Stay positive! 

It’s hard to not get jaded after experiencing missed opportunities and rejection, but keep the positivity going. Enter your next meeting with a smile, a great attitude, zest, zeal and never show desperation. It’s a turn off for investors just like it is for dates.  

Don’t settle for a one night stand 

You may feel like you should just “settle” for the first proposal you get. Don’t enter a partnership too quickly. Make sure the investor is the right match for you, which is the one that will take you to the next level. Money in-hand isn’t always enough. Does the investor have the ability to continue funding your cause? Will they stand by you in both good times and bad? Can they help you make important decisions? Remember, who you partner with will have a strong impact on who your future investors might be.

Investments often last longer than a marriage, and investors want to partner with someone who is great to work through the good and bad times. Show potential investors yourself at your best and think of the entire process as a numbers game. Only so many "dates" – or meetings – until you meet the right partner for you.

5 Tips to Keep Control of Company Credit Card Accountability
Thu, 07 Feb 2019 07:00:00 -0800

Corporate credit cards are an important tool for many companies. Using the company credit card is often the ideal way to manage individual expenses like entertaining clients and business travel. 

However, company credit cards are also one of the most notorious leaks of company funds to bad employee decisions. From simple bad budgeting decisions to outright fraud and theft, these cards create undue opportunity and temptation for employees to misuse company funds.

Fortunately, you can keep these incidents to a minimum with increased accountability. When your employees know that every expense will be examined and recorded according to existing policies, you are far less likely to need an audit in the future. Here are five of the best practices for keeping your company credit card usage on the level.

Editor's note: Looking for the right accounting software for your business? Fill out the below questionnaire to have our vendor partners contact you about your needs.

 
1. Assign One User Per Card

One of the biggest risks with a company credit card is not being able to determine who has made a fraudulent or suspicious charge. This happens most often when a team or whole department shares a single card. This means that anyone with the number, expiration date and security code can theoretically make a charge -- with or without the team manager's knowledge or approval.

In fact, department cards can even open you up to past employees who still remember the details. The solution? Assign cards to people, not teams. Each card should have an employee's name on it and they are solely responsible for how it is used. This way, any charge is linked directly to a person who can be consulted and audited. When they leave, their card is canceled. If a new person needs access, they get a separate card with a separate set of financial records.

2. Set Clear Guidelines (and Write New Ones as Situations Arise)

When it comes to employees who have spending authority, the best way to keep everyone on the same page is to have a clear set of written rules. You want to define how much social employees are allowed to spend entertaining a client, when they are allowed to accept travel package deals, and how it is appropriate to spend per-diem budgets. The more rules you have defined, the easier it will be for employees to follow them.

Of course, unexpected situations happen. Travel mistakes happen and employees have to think on their feet. And when a questionable expense occurs in these circumstances, you realize that a new guideline is necessary to help employees deal with a similar situation in the future. Always be ready to write a new expenditures guideline, with leniency for the first employee to encounter an undefined situation. Consider putting together an easy-to-reference handbook so that employees can check their situation before making a decision or calling for guidance.

3. Ensure That Client Expenses Match a Timeline

Paying for client expenses is absolutely necessary for a number of account-based occupations. Your team members who are in charge of client relationships need the ability to take clients out to lunch and otherwise entertain them, and often to pay for their own travel expenses. This means they need a reasonably free hand with expenses, but this also creates the temptation to "splurge" a little on things the company might not approve of, such as personal hotel upgrades, entertaining romantic partners and inadvisable partying.

The key to accountability with this kind of company credit card is a timeline. Make sure your employees who entertain clients can write a clear report of how they entertained the clients and what each expense on the card paid for. If the reports don't match, an audit is the next step.

4. Have a Clear, Consistent Plan for Handling Problems

Be ready to handle the emergencies and unexpected situations as they do come up. Many employees make mistakes with the company card when they have to solve problems on their own. Missing a flight, discovering a rental car was not reserved, dealing with a client who demands overspending.

If you can, have a plan for handling the unexpected and out-of-control situations before they happen. Policies are a good place to start but you may also want a help line that traveling or entertaining clients can call at all times for help. A travel manager or service and a financial manager who are available for situational consultations can help your employees make the right company card decisions in the moment.

If, on the other hand, there is evidence of card misuse, be very careful about when and how you choose to discipline employees who overstep their bounds with the company card. Let the punishment fit the crime. Be lenient about understandable mistakes and strict about blatant abuse of the privilege.

Also, be as transparent as you can afford to be so that other members of the team can see how you carefully address accounting issues. This will make it easier for employees to report their own mistakes and come to you when they're worried a coworker is misusing their card without fear of unreasonable consequences.

  5. Don't Hesitate to Investigate

When it comes to financial accountability, record keeping is paramount. No matter how much you trust your team and how lenient you want to be, having clean financial records shouldn't hurt anyone who is above-board about their expenditures. This means that for every company credit card expense, there should be a clear and well-defined explanation.

Start by making it a policy to write a report each time the card is used. Just like how the police write a report for every time they have to fire their guns, it's not punitive when it's standard procedure. And if anything doesn't immediately line up on paper, don't hesitate to investigate. Ask the card holder to write a clearer report, explain the unusual circumstances, or audit if you have to. It's always better to know.

 

Keeping corporate credit card accounts on the level requires a combination of well-written policies, record keeping and expert management. When your employees know exactly when and how they are authorized to use their cards, everyone will have an easier time using their cards correctly without mistakes or the temptation to splurge without permission.

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