What Comes Next

New challenges will soon confront small business--but there are ways to cope

We won't kid you. None of the workplace challenges you have faced over the past few years will magically melt away when the calendar turns to Y2K. Unemployment will remain low, which means your workers will continue to be as choosy and demanding as debutantes. Health-care costs will escalate faster for you than for big companies, regulations will remain pesky, and the work-family balancing act will require as much skill as ever--and then some. If that sounds like business as usual, you're right.

But there's some good news about the coming decade, too. Surveys are finding that many workers favor smaller companies over large, impersonal ones. Your leaner, less bureaucratic management structure will enable you to adopt flexible and creative solutions more quickly than large corporations and seize new markets first. Plus, new technology, particularly the astonishing growth of the Web, will allow you to work faster and cheaper than ever before. "That efficiency will only accelerate as the new millennium takes hold," says William Dennis, a senior research fellow at the National Federation of Independent Business Education Foundation.

Here's a look at what's ahead:


The Trend: It's the era of the employee, with the tightest labor market in 29 years. Unemployment is down to 4.1% overall, and as low as 1.7% among college grads. And there's no letup in sight, putting pressure on employers to raise wages. According to the Small Business Administration's Office of Advocacy, about one-third of small businesses reported labor shortages this year. Already, the SBA found, 20% of small businesses surveyed have raised wages, and 10% have improved benefits.

Compounding the squeeze, the Commission for a Nation of Lifelong Learners found that three out of four workers will require some kind of retraining in the next decade. That puts more of a burden on you, the employer, to bring your people up to speed. Demographics are changing, too. Younger workers, who typically command lower salaries, will grow scarcer. The median age of the labor force is now 38; by 2006, it will rise to 41, and the core group of workers--25- to 54-year-olds--will fall from 72% of the workforce to just 68%. At the same time, the labor force will become more diverse. Now, minorities make up 25% of the workforce, but by 2006 that will reach 27%, and by 2050 nearly half of workers will be nonwhite.

Strategies: For starters, keep your valued workers happy. Luckily, it's often easier for a small-business owner to offer the type of environment that workers crave. Take Doug Ross, owner of Evolution Film & Tape Inc., a television production company in North Hollywood, Calif. To stay competitive and keep his 10 full-time and 70 contract workers inspired, he lets them create their own hours, dress as they like, and bring their kids to work. Not many major corporations can match that ambiance. Ross also offers health insurance and is creating a 401(k) plan that even his contract workers can use. "We have groomed these people," says Ross. "We want them to feel invested in the company."

It's also smart to keep your valued workers on track by offering training programs to advance and update their skills. John and Veronica Redmon, owners of the Redmon Group, a multimedia Web design outfit in Alexandria, Va., emphasize employee education. "It helps keep our workers happy and helps us stay on the leading edge," says John Redmon. The company allocates 3% to 4% of annual revenues to training. Workers can request to take a course or attend a conference from the pool of funds. Once they've been trained, employees are then required to share their knowledge with their colleagues. "I try to get them to think about what's good for them as well as good for the company," Redmon says.


The Trend: Those vexing regulations, from IRS forms to Occupational Safety & Health Administration rules to zoning requirements, can drain a small company's resources. Last year, the SBA released a study showing that federal regulations disproportionately affect businesses with 50 or fewer workers. For instance, a company with three workers may have to write the same lengthy OSHA-mandated training manual as a company with 300 workers. Dennis, of the NFIB's education foundation, says the group's members are growing increasingly irritated by what they consider unreasonable regulations. Perhaps in response, regulators have made educational materials more accessible via videos and the Web and are less rigid in how they enforce the rules.

Strategies: Educate yourself about regulations by joining local business coalitions, industry associations, and national business groups. The alternative--keeping your head in the sand--doesn't work. Just ask Bruce and Sheryl St. Hilaire. The couple incorporated their specialty machine business in 1994, after operating as a sole proprietorship for six years. Last year, when an employee griped to OSHA about conditions at the North Chelmsford (Mass.) shop, havoc broke loose. OSHA inspectors came to call and slapped the five-person company with $7,500 in fines. "We had no idea a business of our size was supposed to be complying with OSHA regs," says Bruce St. Hilaire.

If you should end up in a similar dilemma, you don't necessarily have to roll over--try to negotiate. The St. Hilaires were able to bargain their fine down to $1,800 by agreeing not only to fix the violations but also to take an OSHA training class and speak to a group of business people about their experience.


The Trend: Working parents are already stretched to the limits. Parents report having 22 hours less time a week to spend with their families than they did 30 years ago, according to a recent study by the Council of Economic Advisers. Workers with aging parents are also feeling frazzled. The tug of family responsibilities will only become more acute in the coming decade as more women join the workforce and more families are headed by single parents. Small businesses are already starting to offer relief for their workers through flex-time, family leave, and other family-oriented programs. According to a 1998 survey by Arthur Andersen's Enterprise Group, 46% of small and midsize companies offer flex hours, up from 32% in 1995, and 31% offer employee leave, up from 22%. Technology should facilitate flexible work arrangements in the future, in particular, telecommuting.

Strategies: Ellen Galinsky, President of The Families & Work Institute in New York, notes that management's attitudes are more important than programs when it comes to work and family conflicts. In fact, by creating a supportive environment you're likely to create more productive workers. "Our research has shown that if you give an inch, workers will give back an inch--and even a mile," says Galinsky. Sue Wainscott, the owner of Swimtastic, a swim school in Waukesha, Wis., is well aware of that truism. "I couldn't operate successfully if I didn't cater to my employees' needs. They would up and leave. I tell them family is important, but they need to be reliable and responsible."

Wainscott's 35-person teaching staff is a melting pot of high school and college students, working moms, and retirees. To accommodate the inevitable personal crises that crop up, she has a ready supply of backup teachers on call and emphasizes teamwork on the job. "I don't think the world operates in that `work comes first' way anymore, especially not moving into the new millennium," she says.


The Trend: The health-insurance industry has been hurting, and no one has felt the pain more acutely than small businesses. Companies with three to nine workers suffered, on average, gouging hikes of 9.2%, according to a study by the Kaiser Family Foundation, more than double the rate of large employers. "This trend will most likely continue for the next couple of years while the insurance industry rebuilds its profitability," says Jon Gabel, one of the principal researchers on the Kaiser study. The result: Small companies, which lack the clout to bargain for better rates, are dropping coverage altogether (chart).

What's more, some employers with sickly workers may experience even bigger hikes if they're located in one of the many states that allow rate increases based on claims experience, notes Rick Curtis, president of the Institute for Health Policy Solutions. A small company, by definition, does not have a large enough pool of employees to spread the risk.

Strategies: To bring down your costs, find strength in numbers. One option is to join a purchasing co-op. Co-ops are now available in 11 states, but more are being added each year. New York City just added a co-op, called HealthPass, in November. These groups typically serve businesses with 50 or fewer employees and offer a range of quality insurance plans at a range of prices.

Susan Alt, president and co-founder of The Business Word, a publishing company in Denver, joined a Colorado co-op three years ago. In the first year she lowered her premiums by 8%. She is now able to offer her 44 employees four HMO options, instead of the one they had before. "I couldn't afford to offer these choices on my own. My employees are very appreciative," says Alt. To find out if there's a co-op in your area, check out the Web site of the Institute for Health Policy Solutions (www.ihps.org). If there isn't, urge your state's Chamber of Commerce or Business Coalition on Health to form one. Professional associations and trade groups sometimes provide discounts for member companies, too.

Learn more about trends affecting small companies and their workers. Click Online Extras at frontier.businessweek.com

Before it's here, it's on the Bloomberg Terminal.