Friday, September 23, 2005


Gee, Why Don't Printers Make Profits? Here's One Reason

Well, there are many reasons, but one of them is that printers are small businesses, and small businesses have high costs of regulatory compliance.

This report from the Small Business Administration describes the issues:

From the press release:
"America’s smallest firms bear the largest per employee burden of federal regulatory compliance costs, according to a study released today by the Office of Advocacy of the U.S. Small Business Administration. Firms with fewer than 20 employees annually spend $7,647 per employee to comply with federal regulations, compared with the $5,282 spent by firms with more than 500 employees... The report measures disproportionate regulatory compliance impact on small business. The study finds that small business faces a 45 percent greater burden than their larger business counterparts."

It's rarely discussed, but this is one of the benefits of printer consolidation. As environmental laws have grown in volume and complexity, a compliance manager who serves several plants rather than just one is an obvious example of the advantage a larger print business would have. Individual plants have to adhere to the same regulations as multiple plants do, and therefore have to assume greater overhead costs in their plant.

Compliance, therefore, has become a boon for consultants, such as financial, human resources, and legal.

Like higher oil and gas prices, compliance costs grab dollars that could be spent elsewhere, like building the core of the business, or heaven forbid, be used to pay employees more, or even worse, lower prices of goods sold to customers.

Think of it, a 10 employee printer does about $1,200,000 in sales. That means that $76,470 is spent on compliance with various regulations. That's 6%! And Starbucks is complaining about health care costing more than raw coffee? (That'll be in an upcoming WTT column, but I'll get some details on the blog soon).

As economist Milton Friedman always reminded anyone who would listen, regulations are created with only existing businesses in mind, and never to the businesses that will be formed in the future. Why would anyone want to start a manufacturing business? Page 55 of the report shows that $21,919 is the cost of regulation per employee for small manufacturing, the economic sector in which our industry is. Do the the math: it's not 6% of sales, it's 18%! No wonder the service sector is growing: $3,790 is their per employee regulatory cost, which is just one-sixth that of manufacturing. There is a great deal of hand-wringing about the loss of manufacturing jobs; the bulk of those have been "lost" to technological improvements and often non-manufacturing tasks have been shifted to service businesses that work "inside" companies (such as payroll services like ADP or PayChex, or cafeteria services like Aramark, etc.).

All these regulations are well intended when they start, but their slow cumulative effect is enormous. In the end, they create a barrier to entry for new firms, and those dollars, as the economists say, go elsewhere, to other sectors, and emerging offshore economies. Should we be surprised? We've made our own bed, as they say...

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