Eating Our Seed Corn

Small companies today are beseiged with challenges from financing to immigration, regulation to technology and plain, old fatigue—threats we ignore at our own peril


By Dennis Boone



 

First, the optimistic view: Earlier this year, Wendy Guillies, president and CEO of the Kauffman Foundation, declared that after a long period of stagnation and a stubborn decline in business creation, the U.S. economy was poised for a new era of growth.

“While we have near-term concerns, we believe over the long term that the rate of entrepreneurship will rebound,” she said, delivering the seventh annual State of Entrepreneurship Address in Washington. “We’re going to see new sectors emerge that are ripe for entrepreneurs. And the barriers to entrepreneurship are going to continue falling, driven by the spread of software, higher computing power and cheaper server storage.”

Other factors, she said, would be the surge of Millennials bearing down on their late 30s, considered the prime years for taking that first entrepreneurial leap, an embrace of entrepreneurial practices at established companies, and continuing disruption wrought by technology in key sectors like health care and transportation.

Against that backdrop, consider these statistics, from the Small Business Administration, as an Ode to the Little Guy:

  • As of 2012, America’s 28 million small businesses accounted for more than half of all sales in the United States—54 percent.
  • The small-business sector occupies at least one-third of all com-mercial space in the U.S., or roughly 20 billion square feet.
  • The number of small businesses in the United States has increased 49 percent since 1982.
  • And the big wind-up: Since 1990, as big business was busy eliminating 4 million jobs, small businesses added 8 million new ones.

And yet . . .

With all it has going for it, small business in America is facing some unprecedented challenges. While the odds against the start-up company or the family business have always been legion, they’re being compounded at seemingly every turn in the current economic climate.

On the hiring front, as unemployment levels continue to fall—in some states, the rate is approaching what’s considered technical full employment—smaller operations lacking the pay and benefit resources of large companies are having a harder time finding qualified workers and, more importantly, retaining them. Somewhat related to the staffing aspects are immigration issues, for which small businesses, particularly those in the service and construction sectors, run the risk of violating complex regulations for ascertaining whether foreign-born job candidates are qualified to work in America.

On the technical front, small business are pinned between the costs of technology upgrades and the penalties they could face for failure to stay current, threats that come in the form of what the competition is capable of doing, and what more sinister forces on-line could be up to.

On the financial front, even though the Small Business Administration celebrated a record year for loan guarantees in 2015, that type of lending accounts for a tiny fraction of business lending overall.

And on the personal front, those challenges and others combine to present physical, mental and emotional strains that, in a world of 24/7 connectivity, are harder than ever to address.

All of those factors are reasons for concern, given the role that small business plays not just nationwide, but regionally. According to the SBA, 52 percent of the businesses in Kansas employ fewer than 500 people, and 36 percent have fewer than 100; in Missouri, 48 percent of the businesses have fewer than 500 employees, and 34 percent are below the 100-worker threshold. Combined, small businesses in the two states employ more than half the work force.

 

Staffing Challenges

It’s no secret there’s a talent crunch on with employers in this region: A lot of young people are coming into the work force, largely offsetting the retiring Baby Boomers, but those aren’t, in most cases, one-for-one trades. Experience is becoming a premium for employers, and few see that across sectors like staffing agencies and job-placement professionals.

For the small business, says Janine Bedora, business services division manager for Spencer Reed Group, that dynamic can inflict some additional pain.

“I’m working with one client now, a small office, and I had to tell them: In order to get what you’re looking for, you need to pay more,” Bedora said. “They’re not in a position to do that.”

The challenges they face can be financial, but they can also fall on the benefits side where the perks aren’t competitive. “They may have a lack of insurance, or if they do have it, the costs can be a lot to carry for candidates or their families,” Bedora said. “They don’t have the luxury to compete against a Cerner or Sprint, or even the mid-size companies. The larger you go, the better deals you get.”

Often, negotiations won’t even reach that stage because the compensation isn’t there, either. “I can have an administrative assistant with a company that wants to pay $35,000 a year, and the exact same job with a larger company will pay $45,000 to $50,000, with the same responsibilities.”

As a consequence of those and the workforce demographic factors, she said, all companies looking to hire had better be prepared to settle for candidates who don’t hit every job requirement. It’s a good idea to plan on significant training, Bedora said, and on making sure your programs keep employees satisfied.

And, if at all possible, she advises, “companies need to hang onto those Boomers.”

 

The Immigration Riddle

Most employers are familiar with the consequences of hiring an illegal worker, even if they don’t know the full severity of what they face for violations: Potential prison terms and business forfeiture under the Racketeer-Influenced and Corrupt Organizations Act.

Far less understood, says Johnson County immigration attorney Mira Mdivani, is that even a clerical error on an I-9 form—and every employee has one, or is supposed to—can evoke a penalty of up to $1,000. “That’s not for unauthorized employment,” Mdivani says, “but for a simple mistake on the I-9.”

That, she says, presents a twofold challenge for any employer, but in particular, for the small business lacking a sophisticated, dedicated human-resources office: “As an as auditor,
I can tell you that even for a human-resources office at almost any company, there are usually about five errors” on any given I-9 form. “Immigration can just walk in and start applying fines” for that, she says, and that can quickly add up not just with the fines themselves, but with an additional 25 percent penalty for missing certain accuracy thresholds.

Perhaps a larger concern, she said was that since 2009, as immigration officials have been targeting businesses for criminal violations, investigators have been told that if there is little success for building a criminal case, they are to proceed by pursuing civil sanctions. In either case, the legal fees alone present particular peril for small companies.

One of many ironies that lard immigration law is that, while there are significant penalties for hiring unauthorized workers, “businesses cannot discriminate based on immigration status,” Mdivani said. “It really is a rock and a hard place for them.”

To safeguard against that risk, she advises each employer to know and adopt a dozen best practices defined by the Immigration and Customs Enforcement, including use of the e-
Verify system, verification of Social Security numbers, having written plans, policies and procedures for addressing immigration issues, use of trained auditor for internal audits, annual training of HR personnel and other steps that can help avert both prosecution and penalty.

Too many executives, she said, will ask their HR specialist if they’re covered on such points, “and they’ll be told, ‘We’re fine,’ but that’s not so. That’s why ICE has such an easy time walking in and imposing fines.”

 

Mastering Technology

As technology continues to dazzle us and bottom lines become harder to defend, a small business owner in the service or creative sectors may look at the rent and utilities lines on his income statement and see fat targets for improving profitability. It’s already happening.

“It’s been coming for a while, but in 2016, we’ve reached a point where whole companies are being run virtually,” says John Leek, chief strategist for NetStandard, an IT services company in Overland Park “They do not have an office building, and they are using technology that’s cloud-based,”

The good news, he said, is that owners can get services that optimize a business from the cloud, and quite affordably. From there, they can do their data analytics, marketing analytics
and outreach and other things that once required an office. If they have employees, those workers are now based from their own homes, which can improve their quality-of-life issues.

Operationally, though, a number of blind spots are emerging for business owners, Leek said. “They think maybe they don’t have to pay for office space, but people need to get concerned about productivity, about their intellectual property, about their data and where all of this might be going.”

Many business owners, he said, have smart phones that connect to a company’s e-mail system, to CRM systems and customer lists and other vital data sets. Many of those devices, he said, whether company-issued or bring-your-own set-ups for employees, still lack basic security precautions.

“I often ask at group events, how many of you have a password on your phone, and only about one-third of the hands go up,” Leek said. “The point is, data is important. For a growing business, as they scale up, they have sets that become more valuable, and they need to consider how those should be protected.”

That’s particularly true, he said, because the global connectivity of the Internet yields roughly 82,000 new computer viruses every day. And the level of sophistication among the
bad guys is increasing too, with the social-engineering ability to create electronic communications that appear to be genuine in-house directives from the top, ordering immediate payments of purportedly overdue or critical invoices.

“They are organized and structured,” Leek said, “It’s no longer the e-mail from that African prince who needs help with a banking transaction—nothing stupid like that. These are mostly highly sophisticated.”

All of that, he said, makes it increasingly important for business owners to understand the levels of risk they assume with their technology, to know how that matches their business risk, and to have established guidelines for addressing data breaches, data loss and data theft. One other emerging tool, he said, is cyber-risk insurance, a type of coverage becoming more and more popular.

 

The Fatigue Factor

Over the course of nearly 40 years in working with business leaders and organizations as counselor, coach and psychologist, Bernie Sullivan has seen about all the challenges that business ownership can throw at someone. But is it any different today, in the aftermath of the Great Recession, than it ever was?

“I think it is,” he says. “In general, the amount of emotional stress, the anxiety and worry, the kind of insecurities and feelings of frustration, the exhaustion and stress, especially since the recession, has increased. It’s more frequent, and seems to be deeper and more pervasive because of the long downturn in the economy.”

One factor, Sullivan said, isn’t necessarily the type of challenge facing an owner, but the non-stop nature of communications today: If you have a mobile phone, you’re always at work. For what he calls the Super Alphas, that 5 percent of the population that seems to thrive when the game is on
the line—think Michael Jordan demanding the ball as the clock winds down, or Babe Ruth approaching the plate with the score tied in the bottom half of the ninth—responding to that level of stress is programmed into the genes.

For the rest of us, the 95 percent who are merely human, the anxieties and feelings said that the most important thing for a species to survive is
not competition, but cooperation:
How do we get individuals to cooperate like ants and bees, who are totally cooperative? That’s much more important than competition.”

The first step out of that, he said, is a longstanding principle of organizational improvement: “I recommend they delegate more,” he said. “A lot of them are so deep in the struggle, they’re taking on more and more responsibilities, and that’s exhausting.”

“That makes it harder to feel secure in your life,” Sullivan said. “Worst of all, that’s a miserable way to live.”