Managing High Regulation Cost

By Maurie Cashman

Managing high regulation cost is a key risk management strategy that all companies should have in place. According to a Harris Poll:

• two-thirds of US small business owners believe their government’s policies are unfavorable to small business:
• 32 percent rate US policies as very unfavorable;
• 53 percent of small business owners believe that legislation hampering small businesses as well as the overall economic health of the United States (53 percent) will get worse in 2014;
• 76 percent of small business owners strongly agree that the amount of federal government regulations regarding employee benefits is restrictive to the growth of small business;
• 75 percent believe state government regulations also restrict the growth of small business;
• 35 percent think that the impact of the Affordable Care Act has been worse than they anticipated.

Small Business Bears Burden

Government regulations have a much larger effect on small businesses than they do to larger entities. The reasoning for this is three-fold:

• These are basically fixed costs. Smaller companies register a higher cost-per-employee and per dollar of revenue than larger firms.
• Smaller firms lack the internal resources to understand, analyze and minimize the cost of these regulations;
• The cost of capital and insurance is higher for smaller firms due to these risks.

Nicole and Mark Crain of Lafayette University say the price tag for complying with federal regulations by company size is as follows:

	Cost per Employee
Type of Regulation	AllFirms	Firms with <20 Employees	Firms with 20-499 Employees	Firms with 500+ Employees
All Federal Regulations	$8,086	$10,585	$7,454	$7,755
Economic	$5,153	$4,120	$4,750	$5,835
Environmental	$1,523	$4,101	$1,294	$883
Tax Compliance	$800	$1,584	$760	$517
OSHA and Homeland Security	$610	$781	$650	$520

The Heritage Foundation found that the cost of federal regulations to businesses rose by $70 billion between 2009-2013 and the number of federal regulations affecting small companies rose 13% between 2008 and 2012. Remember that Obamacare, Dodd-Frank and other regulations were not fully implemented yet so this inflation rate may be understated.

Small businesses may be able to reduce the cost to keep up with changing regulations by outsourcing some overhead functions. Moving regulatory burdens to third parties is one of the best ways to minimize the impact of regulations.

How Can These Costs Be Managed?

As a part of any ownership transition plan we always look at minimizing regulatory costs. Having been responsible in a former life for OSHA, FDA, EPA and influencing legislators and regulatory agencies on regulatory implementation I know that it is absolutely critical that you not try to go this alone. We had a team of engineers, attorneys, risk-management specialists and financial analysts to attack the problem. You (and now I) do not have the advantages of a huge firm.

Here are some things that you can consider to reduce the impact of these costs on your firm:

• Grow your business. By growing revenues organically or acquiring a company you can reduce the impact of regulation per dollar of revenue in your business;
• Acquiring another business may allow you to acquire certain expertise that you currently lack;
• Consider selling your business if you cannot deal with the increasing complexity of regulation;
• Partner with other firms with similar issues to pool your resources. You may decide to outsource certain risk-management functions in which case you may be able to negotiate lower compliance costs with a third party provider;
• Cooperate with firms with complementary skills or resources to those that you provide. This minimizes the risk of trying to provide services that you do not excel at and that other have developed specific skills;
• Participate in industry associations if understanding and influencing regulation is important. Pooling resources will reduce cost and increase influence on legislators;
• Implement written processes that reduce risk within your firm. Place strict measurements in place for elements that pose particular risks and review them regularly;
• Evaluate and incorporate the regulatory environment each year as part of updating your business and ownership transition plan.

Reducing the costs of regulation is similar to managing any other cost of doing business. You must be informed, attentive and should employ an experienced advisory team to advise you as to how to minimize the costs and risk of regulation.