Many companies today are caught in a pricing squeeze. This is because they find they are unable to pass along higher costs to their customers because they either fear losing business to lower-cost providers or are themselves committed to long-term contracts at specified pricing.

Recent research bears this out. According to J.H. Cohn’s “2004 Business Owners Checkup” -a national survey reflecting the opinions of chief executives and other senior officers -increases in operating expenses, coupled with price hikes from suppliers, have crimped profit margins for many mid-sized companies. Among the findings among companies surveyed:

· Most reported increases in their healthcare benefits costs (89 percent), property and casualty insurance (85 percent), utilities (74 percent) and payroll (71 percent) during the past three-year period.
· About half said the following areas of operating expense increased in the past three years: Technology security (55 percent), capital equipment (53 percent), state and local taxes (53 percent), auto and travel (51 percent), freight (49 percent), and marketing and selling (49 percent). However, fewer than half of the businesses surveyed stated that their costs for telecommunications (43 percent), rent (41 percent) and building security (23 percent) had increased during the same period.
· Sixty-seven percent of business owners said they were able to pass along at least some of their additional costs, but 32 percent could pass along none. Smaller companies fared worse than larger businesses: Forty-one percent of companies with fewer than 100 employees were unable to pass along their higher operating costs to their customers, compared with just 21 percent of companies with 100 or more employees.

No Pass Along
One statistic jumps out from all of these numbers: One-third of all companies say they cannot pass along rising costs to their customers. (And the other two-thirds probably wishes that it could pass along more of its costs to customers.)

What can business owners do to offset the pressure they are feeling from suppliers who are charging more for fuel, raw materials and other necessities, and customers who are insisting they hold the line on price increases?

Certainly, there are opportunities to negotiate pricing, and business owners may have more bargaining power than they think. I haven’t met a CEO yet who wants to lose a sale, unless it’s really unprofitable or a bad credit.

Sales that suppliers make to mid-sized companies often carry higher margins than sales made to multinational corporations.

Rather than jeopardize these lucrative relationships, suppliers may be willing to trim their prices instead.

But if you’ve already done the best job you can in negotiating with your suppliers -or if there are certain costs that are outside your control -what else can you do?

According to our research, business owners have taken -and plan to continue to take -several steps to protect their profit margins. These include:

· Improving operating efficiencies -Eighty-nine percent have taken such steps and 74 percent plan to continue to do so.
· Increasing their use of information technology -Sixty-eight percent have done this and 57 percent plan to continue.

Let’s look at these strategies in more detail.

Improving Operating Efficiencies
The single most important thing companies can do to improve operating efficiencies is to focus on productivity. This is because costs are driven by productivity. Businesses must drive costs out of their overhead and their operations -and do so continuously.

To do this, businesses must rigorously examine every element of their operations, establish meaningful goals to improve performance in each of those areas and select appropriate metrics to gauge progress quarterly at a minimum, and monthly or daily, if at all possible.

The goal is to drive costs out of the business because, ultimately, the only way to compete is if you’re the low-cost producer or close to the low-cost producer.

Larger companies can spend more on capital equipment to drive costs out of their business. Smaller businesses may not be able to spend as much on capital equipment, but can offset that by making sure they don’t build up their overhead too fast.

Questions to Ask
Frequently, it is best to use dollar-denominated metrics, such as sales-per-direct-labor-dollar or sales-per-direct-labor-hour, to measure progress. Some questions to ask:

· To what degree are you utilizing the capacity you have?
· If you are a manufacturer, are you operating 24/7?
· What are your costs of shipping and logistics, both internally and externally?

Given the recent increases in transportation fuel costs, a number of companies today are finding that a real balance must be maintained between outsourcing and keeping their transportation functions in-house. And they are finding this is the case even for their local shipments.

Another area that’s often ripe for improvement is information technology. Many companies fail to maximize both their investment in and utilization of information systems. They don’t maintain accurate records of basic things, like inventories and even invoices.

As a result, they end up ordering more product when they already have it on the shelf.

Such businesses don’t use technology as a productivity tool. Professional services companies, for example, can use information systems to manage their projects consistently and effectively.

Manufacturers and distributors can use them to keep their warehouses stocked with just enough -and not too many -ingredients and raw materials.

The Real Costs
Without appropriate information technology, it’s difficult for businesses to know what their real costs are. Activity-based costing can be a crucial tool for establishing and justifying increases in pricing.

The Internet is another resource that can increase productivity significantly. If that’s how you can take orders or place orders, or distribute information or distribute self-service, the Internet is a fundamental tool for driving costs out of your business at every level.

The companies I know that are doing things right are process-driven and process-disciplined. They have senior management teams that understand there are differentiating factors that drive productivity.

With those teams at the helm, these companies are establishing effective business processes, using technology to manage those processes and making sure their organizations stay disciplined for the processes that are developed.

Without a gameplan, when the time comes to justify an increase in their pricing structure, companies are hard-pressed to achieve something to which they should be entitled -and they find themselves in the middle of a pricing squeeze. FAD