Automation's Impact On Mergers And Acquisitions

With so many agencies looking to merge with or acquire other agencies, automation has become increasingly important-so important, in fact, that an agency's automation can play a critical role in making or breaking a deal.

Approximately 40,000 independent insurance agencies existed in 1996, according to industry surveys. That number is down from 69,500 agencies in 1983; 53,500 in 1987; and 46,000 in 1992. Most industry observers anticipate that the number of agencies will continue to shrink because of business failures and mergers and acquisitions.

The fair market value of an agency is affected by its automation level to the extent that its use improves productivity. Agency values are positively affected if automation use improves the quality of client service, account retention, carrier relationships, and the sales process. Timely and meaningful information that helps management to run an agency more effectively is an extra bonus.

Automation's has the following impact on agency value:

• Increased productivity and profitability
• Better quality of service to clients, resulting in increased account retention
• Improved communications, submissions, and relationships with carriers
• More effective sales processes
• More information for better decision making

During the past 10 years, agents and brokers have become much more dependent on automation. Today's agents not only depend on the traditional agency automation system for basic policy transactions and accounting, but also on a variety of software packages and computer systems that include sophisticated systems for interfacing, rating, word processing, presentations, telemarketing, E-mail for both internal and external communications, specialized technical information, spreadsheets, time management, and human resources management.

Just as effective use of automation can enhance an agency's value, ineffective uses can adversely affect the merger/acquisition process. Any agency considering acquiring or merging with another agency that has not effectively utilized automation should seriously consider the time and expense required to bring the agency in question up to speed. As anyone who has been through the process can attest, the time and expense required can be significant. Not only are there the actual costs of equipment, software, conversion, and training, but there are also hidden costs of work disruption-and the frustrations of both the buyer's and the seller's staffs.

An agency considering an acquisition or a merger with another agency also must explore the types of automation systems and software programs being used. If the software or hardware systems are identical or compatible, life after the merger/acquisition will be a lot easier. If, on the other hand, the systems are different, some major decisions must be made in a hurry. The two agencies can elect to continue operating with two separate systems; select one of the two systems; or go with a new system for both. These are major decisions that will affect the operations of both agencies and the financial results of the transaction.

Other considerations are important, too. Though selection of the agency-management software system(s) is important, other factors are involved. Decisions about training, data conversion, and procedures must be made, each with a far-reaching impact on the ultimate success of the merger or acquisition. As many agencies can attest, changing an automation system can be the 'best decision ever,' or it can almost devastate an agency and its staff.

In a merger or acquisition, the following factors are basic to system selection:

• Basic system being used
• Software (agency management and others)
• Hardware
• Training
• Data conversion
• Procedures

Agencies anticipating future acquisitions should keep those acquisitions in mind when making automation decisions for their own systems. The capacity of the system, its ability to handle multiple locations, and its ability to handle companies or multiple profit centers are all important considerations.

Similarly, agencies anticipating a sale or a merger with another agency in the not-too-distant future should evaluate current automation systems and operations. If a change seems appropriate, the agency should seriously consider the costs and the benefits involved. An investment in automation may be helpful in many respects, but if the acquiring organization chooses not to utilize the selected system-even a relatively new one-software and/or hardware may be of little value. If this happens, the automation investment may need to be written off, which only depresses the actual sales price.

An agency anticipating a sale in one to three years might not be justified in making a significant investment in automation. But a unique situation, such as knowing the identity of the buyer and the system being used, could cause a change in plans. Sometimes a significant investment is justified, even if the possibility exists that the acquiring organization doesn't have the same system. If there is enough time to see the benefits in productivity that a good automation system can provide, a sufficient return on the automation investment should be reflected in the sales price.

Obviously, acquisitions and mergers are executed for many reasons other than the compatibility and/or effective use of the automation systems. At the same time, however, anyone who has ever been through a significant acquisition or merger knows that those problems can be a source of major headaches. Mergers and acquisitions can be a distraction or result in huge expenditures. Agencies thinking of future acquisitions or mergers should look carefully at all facets of the automation issue.

For a successful merger or acquisition to take place, we recommend a thorough look at the value of the organization under consideration. The time and money needed to finalize the transaction must also be carefully assessed.

As you can imagine, the conversion process is a major undertaking that requires much planning, cooperation, and verification. It's all worth it, though, when the new users begin to work on a new system with the customers' records already entered. This, combined with an effective training program, can greatly reduce the stress usually associated with a merger or acquisition.

--------------- Steps to a Relatively Pain-Free Conversion ---------------

• Designate a project manager to guide the efforts of the conversion team.

• Before the data conversion, clean up data in the converting agency's records as much as possible, checking the information for spelling, consistency, and accuracy. This can be accomplished by printing out a database listing of the records and specific fields to be converted. You may choose not to convert inactive clients. This can be accomplished simply by inserting a special 'do not convert' flag in the customer's record.
• It's a good idea to include special coding in each converted record to show that the record was added during the conversion process. You also may want to use a unique series of numbers for the converted agency's clients and producers. This is useful for tracking the activity of new clients and their policies, and it can explain unusual field entries if something does not translate as anticipated.
• Invoice transaction records can be converted either as memo entries for reference, or as closed and open transactions. Carrier payable records or open accounts receivable may be converted into the new system as open items.
• Training for new users should be easier than the original system training because specific agency procedures are already in place. Whether using vendor trainers or in-house staff, it's a good idea for new users to be taught the actual agency procedures and code numbers to be used with the new system.