Straight Answers: How Can You Survive the Regulators?
Whine, whine, whine. We keep hearing about overzealous regulators bearing down on small businesses, but some smart CEOs have found ways to hurdle red tape. Here's how
If the Regulation Stinks, Work Around It
Robert Long, Co-owner
St. Helena, Calif.
Just under $1 million in revenues
The legislation repealing Prohibition gave the federal government authority over the manufacture of alcoholic beverages and the states the right to regulate their sale and distribution. So the wine business deals with all kinds of regulations, and among the most frustrating is that many states we sell to -- outside California -- require us to register with them and comply with regulations prohibiting us from selling directly to consumers, wine shops, restaurants, or hotels. We have to sell through a distributor.
For small wineries like ours, it's hard to do marketing and public-relations work and sell to the consumers, because the distributor gets in the way. Distributors make money by representing large wineries and selling high volume. Our chardonnay is fairly well known, so a lot of distributors feel it's a feather in their cap to have such a wine to offer. But wineries that haven't yet developed their reputation get lost in the shuffle.
The states argue that they must issue licenses in order to tax and to regulate the flow of alcoholic beverages. But the revenue represented by small-winery sales is infinitesimal -- not enough to justify all their paperwork. So we avoid those states where it's onerous. I sell 75% of our wines here in California, where I can sell directly, and in New York and New Jersey, which have no licensing fees. In effect we've decided to be regional -- on opposite coasts.
Wine shops and restaurants that are willing to sort of circumvent the regulations buy from us. If they're willing to do it, we're willing to do it. They order the wines. We ship by common carrier or by airfreight. I presume they're in states where only distributors and not retailers have a reporting requirement. So it's really a flaw in their states' laws.
The states are being shortsighted. If we could sell directly to consumers and wine shops, we'd have to visit the states more and invest more time, energy, and sales dollars. It would benefit those states by generating more revenues.
It sounds extremely reasonable, doesn't it? It is reasonable. But it's so bureaucratically complicated. It's like pushing the rock all the way up the mountain.* * *
Work with Regulators
S Greg Klochkoff, CEO
Advanced International Technologies
North Kingstown, R.I.
You have to understand the compliance issues that affect your business and then ask the regulators for help around the pitfalls. We've found that if we explain our problems, most regulators are willing to work with us. They're enforcers, but they're human.
If you can, you should visit in person, explain who you are, and try to put faces with names. Tell them what you're doing, what you're importing, or what you're trying to create.
We're a systems integrator for sophisticated electronics products and electro-optical products. We've got to meet a host of safety and customs requirements. So we're always lining up needles and putting a thread through each one. We're affected by the Food and Drug Administration, the Center for Radiological Health, and Underwriters Laboratories, as well as U.S. Customs, which enforces laws for 40 or 50 agencies.
We make products in several Russian factories and bring the pieces over here to integrate into binoculars, scopes, low-level laser devices, thermal-imaging tools, and infrared night-vision products. In addition to U.S. regulatory agencies, we deal with Russian regulatory agencies. It makes it easier that I speak fluent Russian, but Russian regulations can change suddenly for no apparent reason. Or the interpretation of a ruling on certain regulations may vary day by day and from place to place. We've found the U.S. regulatory environment is friendlier. If we get a ruling from U.S. Customs in New York, it applies everywhere else we import. We can rely on the consistency of enforcement.* * *
Change Your Product Strategy
Tom Weldon, CEO
Close to $1 million in revenues
In a heavily regulated industry, it's impossible for one company to have a meaningful impact. The rules are derived from legislation passed by members of Congress in the best interest of their constituency. So you may point your finger and say the regulators are bad guys, but that's not really true. They're bureaucrats trying to follow the laws.
There's no point in being antagonistic. Many agencies have a hard time with morale. Congress is often at odds with them for not being aggressive enough in enforcing the law but rarely appropriates adequate budgets for them.
The regulators have the law on their side, and Congress has helped propel them into a risk-avoidance mode. You can't possibly win. There are companies that sued the FDA and won their case, but subsequently, it seems, they've had a very hard time getting FDA product approvals.
The Safe Medical Device Practices Act has required us to change our business strategy completely. In the past a blockbuster product, even in a new technology, would take one to two years to gain FDA approval. Now you're probably looking at two to six or seven years. Approval for small products that used to take 90 days may now take well over a year.
Our development mix calls for some new products that aren't as punishing in terms of getting approval -- small products that don't have market impact but do generate cash flow and enhance our opportunities for financing. So we can't focus all our efforts on potential blockbusters.
We've always been aggressive, but we didn't always interact with agency personnel. Today there's so much at stake we can't afford to make a mistake. We try to meet with the agency early in the planning stages.
The classic development of a new medical device would be to invent a technology and then manufacture and sell it ourselves. Then we'd take the company public. We'd end up with a wholly owned technology with wholly owned manufacturing, wholly owned distribution.
It used to be that the critical goal was market penetration. Now it's regulatory approval. We have to look at what we can sell. We can't sell an unapproved product to a consumer, but we can sell it to another company with more patience. We might get $2 million for the product-line assets. If we could wait for regulatory approval, the assets might be worth $5 million. With $4 million or $5 million in annual sales, they might be worth $15 million if we could go public. Because of the regulatory environment and the financial pressures of building a business, we can't always wait to get the highest price. We have to be willing to sell off a few children for the good of the family.* * *
Be a Voice in the Wilderness
President and CEO
Centigram Communications Corp.
San Jose, Calif.
About $80 million in revenues
There are several regulatory issues facing us. Our business provides voice-mail systems to phone companies, corporations, and institutions. The breakup of the Bell system in the early 1980s forbade the Baby Bells from getting into manufacturing, long-distance service, and, for a period of time, enhanced services like ours. That eliminated a key opportunity.
I worked to change that by writing op-ed pieces and testifying before Congress. My concern was that small companies like ours would be prohibited from growing through the sale of our equipment to the phone companies. I maintained that small companies have always thrived around large companies. We're highly creative, and we move quickly and cost-effectively. In joint ventures with the Baby Bells, I argued, we could better leverage our technical resources with their marketing and financial strength.
The first positive step, the 1988 relaxation of the ban against enhanced services, provided us with a number of opportunities. And we've grown despite competition from Northern Telecom, AT&T, and others.
I continue to write letters and op-ed pieces and to testify, and now we're seeing serious consideration given to reversing the ban against manufacturing and even long-distance services.* * *
Practice Preventive Maintenance
Jack Stack, CEO
Springfield Remanufacturing Corp.
Close to $100 million in revenues
We've gotten nitpicked here and there. Some regulator would come in and see an electrical cord that wasn't in place. But -- knock on wood -- since we've addressed those issues head-on, we have not had to pay a fine or a penalty for any violation.
Regulation is such a big, unpredictable part of business now. It's frightening that the best you can do about it is preventive maintenance. We're faced with affirmative action, the Equal Employment Opportunity Commission, the Occupational Safety and Health Administration, sexual harassment, and the Americans with Disabilities Act, just to name a few of our concerns.
So we put regulation first on the agenda of every board meeting. For each regulation we're subject to we ask, "Where do we stand?" We have a full-time lawyer whose responsibility it is to get the data from all our subsidiaries. Since the board took on this oversight role, about a year ago, we've devoted one-third of each board meeting to regulatory matters. -- Reported by Jeffrey L. Seglin