The Cost of Government Regulation & How Business Strategy Can Be Used to Mitigate Its Impact

Small business is facing many challenges today, none of which are more foreboding than burdensome Federal Government Regulation and mandates that thwart investment and stifle job growth. Over the past few weeks I have Tweeted and commented on Facebook about many aspects of business strategy and how it can be employed to direct solutions to most business issues, hurdles, obstacles and the conduit for achieving growth. In fact, it is my area of expertise. However, with all things in life and business, there are issues, such as government regulation (and taxes), that we cannot control, only react to. So we can use business strategy to mitigate the cost of government regulation by first understanding its aspects, and then developing a strategy or strategies for dealing with it, always with the focus of moving ahead, pushing forward and growing.

The Cost of Government Regulation

I see three ways government regulation impacts business, primary small business: regulatory compliance, weakening the competitive market position against international competition, and increased uncertainty.

Regulatory Compliance. Researchers at Lafayette University in a report entitled “The Impact of Regulatory Costs on Small Firms” estimated that in 2008 Federal Regulation costs small business with less than 20 employees $10,585 per employee annually, where it costs larger firms with more than 499 employees $7,755 per employee annually; that is a $2,830 differentiator heavily impacting small business. If you consider for a moment a small business with twenty employees, this amounts to nearly $212,000 of additional business costs on an annual basis along with the opportunity cost of an equal amount in lost infrastructure investment and new jobs. What is also interesting is that when you look at the distribution of regulatory compliance by firm size for small business with less than 20 employees, compliance with economic regulations cost $4,120, followed very slightly by environmental regulations at $4,101. Combined these account for nearly 78% of regulatory compliance for small business, contributing to the majority of this cost factor. This major cost factor alone erodes small business growth.

Weaker Competitive Market Position Against International Competition. The Lafayette University report found that the one of the most significant impacts of government regulations on small business was a weakening international competitive position as a result of increased cost of business resulting from government regulations. U.S. goods cost more than those produced on foreign soil, adding to the trade imbalance as well as providing market advantages to foreign companies, which further erodes small business growth.

Increased Uncertainty. Small business Chief Executive Officers, or in some cases, Chief Everything Officer, (in both cases CEO,) are faced with rising uncertainty about the prospects of investing and hiring as a result of government regulation and deep concern for ‘what’s coming next’. Until Monday, January 31, 2011, Obamacare was seriously thwarting growth, and in particularly the individual mandate and 1099 provisions. Now that this law was struck down as unconstitutional by Federal Judge Roger Vinson, the law is null and void, and headed to the U.S. Supreme Court. The conundrum faced by small business to large firms across the country is the uncertainty of the U.S. Supreme Court decision. A free market advocate would hopefully speculate the Court will uphold Judge Vinson’s decision, however we cannot hold our collective breath because we simply do not really know what the outcome will be, hence increased uncertainty, further eroding in particular small business growth.

A Business Strategy Solution

The definition of business strategy is a long term plan of action designed to achieve a set of goals and objectives. For instance, a goal can be to reduce the impact of government regulation on your business, where the objective is to accomplish this within thirty days. Most often business strategy involves an actionable plan to achieve a set of goals, with objectives, rather than one goal and one objective. But there are exceptions to that of course. Business strategy should focus on improving performance, saving money, and making money. For example, business strategy is an excellent tool to accomplish the following:

* Establish alternative revenue streams.
* Develop and execute a strategic growth plan.
* Asses and acquire new market opportunities.
* Identify, solve and eliminate business hurdles.
* Develop and execute a business capture strategy.
* Link all financial decisions to strategic business objectives.
* Establish a plan for acquiring the right executive management team.
* Transition from a traditional fixed/variable cost model to a variable cost mode.

In tackling the excessive and escalating burdens of government regulation, how can we use business strategy to mitigate the cost impacts of government regulation, and to actually construct a road map for growth. First of all , we need to see what government regulation is in terms of a cost factor. Since government regulation does not vary with production or output, it is typically a fixed cost; although it does vary and is becoming more burdensome. Ok, so government regulation is a burdensome fixed cost, how can we mitigate its impact, develop a plan to manage it, and actually grow a business inspite of it. Our business strategy is clear: develop a long term plan of action to mitigate and effectively manage the impact of government regulation on business operations and costs, and meet growth objectives within a specific time frame, say thirty days. In this example we have three goals:

1. Goal: Mitigate-reduce, impacts of government regulation.

2. Goal: Effectively manage government regulation by limiting its impact on business operations as a cost factor

3. Goal: Develop a growth plan.

For any business strategy to be effective, it must involve a solution or resolution to a problem, obstacle, crisis or dilemma. In our example, we are seeking to resolve a big problem…how to handle government regulation in a cost effective way that allows for business growth. Our solution, implement a variable cost model to shift the burden of fixed cost to others, and focus on increasing returns for growth. In 2010, Variable Cost Models emerged as the new paradigm for small business growth companies. This variable cost model reduces the need for the small business to make large capital investments to enter new markets and its variable cost structure protects operating cash flow.

There are multiple reasons why a variable cost model makes good business strategy for mitigating and managing government regulation. Fixed costs can be significantly reduced primarily by 1) partnering with other small business in sharing physical space, and 2) employing business infrastructure service companies, such as UPS for logistics, contract manufacturers for production and contract support services such as ADP for financial services. Fixed costs can also be reduced further using, on a limited basis, a group of related technologies such as cloud computing, and server and network virtualization which provide a combination of shared benefits and costs. However, according to Chris Drake, CEO and founder of FireHost, Inc., a secure Web hosting company, cloud computing is not well suited for mission-critical sites and SaaS applications, and you cannot achieve compliance mandates of HIPAA, PCI, SOX, etc. when storing data in and serving applications from “the cloud.”

The use of the variable cost model as a business strategy is to shift as much of the fixed cost burden to a shared basis with other enterprising small business companies, significantly reducing individual company fixed costs to a marginal level, providing for more manageable oversight of the cost of government regulation, and creating a lower break-even point. A small business then can focus on increasing returns which occur where an increase in quantity produced is greater than the increase in inputs to produce output, and as production increases, variable cost decrease yielding the optimal business growth position.

In this example, we have used business strategy to mitigate the cost of government regulation by first understanding its aspects, then establishing a solution to reduce its impact with the focus on growth, and how to achieve it. The application of business strategy to solve a problem and/ or to meet a need must be a fundamental tool that small business employs on a consistent basis. Remember, business strategy is a long term plan of action designed to achieve a set of goals or objectives.

The Cost of Government Regulation & How Business Strategy Can Be Used to Mitigate Its Impact

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