ADL #70: The Real Cost of Legal Compliance
An SME Perspective
Here’s a thought instead of an intro for today’s newsletter: If legal compliance costs were smaller than potential fines, would you be more willing to comply? Or inversely, if fines were significantly higher than compliance costs, would that finally motivate full compliance to regulations?
Perhaps these questions miss the mark entirely. What actually drives businesses to take necessary measures to comply with the law? Is it fear of penalties, or something deeper?
This week's news that EU regulators are considering reducing GDPR compliance requirements for SMEs inspired me to examine the true costs of running a compliant business. Why we pay them, why we resist them, and the uncomfortable truth that without certain costs, our businesses cannot grow sustainably.
Today, I'm setting aside pure legal explanations to focus on something more pragmatic: the economics of legal compliance.
The Broader Context: Regulatory Burden as a Competitiveness Issue
It's important to understand that the discussion about GDPR compliance costs takes place within a larger context. Regulatory burden has become a significant brake on Europe's competitiveness. Despite the EU's advanced better regulation policy, for two out of three companies, this burden represents the key obstacle to long-term investment.
Recognizing this challenge, the European Commission has established ambitious quantified targets for reducing reporting burdens, more specifically:
At least 25% reduction for all companies
At least 35% reduction for SMEs
These reporting burdens represent a subset of overall administrative burdens but constitute a significant portion of compliance costs for many organizations.
How Much Are You Willing to Pay for Stability?
During my MBA studies, one lesson particularly stayed with me. The professor emphasized how frequently small business owners fail to include their own salary in their budget projections.
Restaurant owners work day and night without accounting for their time.
Startup founders neglect to plan for their own compensation.
E-commerce business managers tend not to value time spent on tasks outside their professional expertise.
This oversight creates a fundamental disconnect in understanding the true cost of operations.
Why This Matters
Profitability should reflect your risk, not merely your time investment. How is that?
Profitability should exceed salary
By accepting small profitability, you devalue your own risk
If you don't pay yourself a salary, you do not know how much is your hourly worth
Without knowing your hourly worth, you cannot accurately assess when to delegate
By maintaining this flawed thinking, many entrepreneurs remain trapped in operational small work rather than focusing on strategic growth. They choose to "do it themselves" instead of leaving others to fulfill tasks that would free them to concentrate on expansion. Others that are more proficient.
This is precisely where legal compliance enters the equation. Its value remains invisible to the "do-it-yourself" entrepreneur because it will always seem prohibitively expensive – until you quantify the alternative.
The Hidden Cost of DIY Compliance
Consider how many hours of your valuable time you'll spend to:
RESEARCH what regulatory requirements apply to your business
IMPLEMENT those requirements across your operations
WORRY about whether you've interpreted and applied them correctly
REMEDIATE issues discovered during regulatory inspections or audits
Have you calculated the true cost of this time investment? At your hourly rate (which you should know), what is the financial impact?
Here's a piece of advice: whenever you budget a new project, allocate at least 5% specifically for legal fees. Not combined legal and accounting, but legal fees alone. If this seems unaffordable, it's worth reconsidering the project's viability altogether. And yes, as surprising at it seems, all companies that actually grow invest (!) in their legal team.
The business environment has transformed dramatically. Twenty years ago, our parents could launch enterprises that operated solely within their local communities with minimal regulatory requirements. Today, this is not possible anymore.
So I'll ask again: How much does compliance truly cost your business? And more importantly: how much does non-compliance cost you in terms of risk, opportunity, and peace of mind?
Have some thoughts?
Reply to this email and let’s chat! I’m open to constructive criticism and new and brave ideas.
See you soon! The next issue is on April 24.