SEVEN MANAGEMENT KEYS GO BEYOND SURVIVAL
by John Jaques
For independent agencies to thrive in today's tough economic environment, agency management must actively and strongly implement seven management keys to unlock current profit potential, build growth, and create additional agency value.
FIRST KEY: STAFF PRODUCTIVITY PLANNING
Despite the economic downturn, lowered premium rates, and shrinking profit margins, most agencies still are overstaffed. As personnel is the largest cost in any agency and the cost of other overhead expenses goes well beyond salaries (office space, supplies, automation, administration, etc.), controlling the number of bodies in an agency is the first key to success.
These levels are minimums only and should be exceeded by most agencies. When reviewing staff productivity, a few points should be kept in mind:
1. Ask whether the employee would have to be replaced if he or she were unable to return to work. In some cases, one employee's duties could be effectively spread to other employees without hiring a new person. If it is found that one or more employees would not have to be replaced, the staff should be reduced.
2. Consider a new type of job position. When an agency needs to add staff, consider the benefits of creating a new type of job position before adding another employee in the same job position. The key is to add a job position to cover specific functions or tasks previously performed by a number of other employees. For example, add a customer service representative (CSR) assistant in Commercial Lines to take binders, certificates, invoicing, and filing from CSRs. Hiring an assistant costs less than hiring a regular CSR and allows CSRs to handle larger books of business.
Don't staff in anticipation of growth. Doing so leads to the following problems:
Cash profit is spent for new people before they are needed, thus lowering agency profits. The anticipated growth may not materialize due to factors outside the agency's control (economy, premium rates, commission rates).
At the time new help is added, the workload for all employees is reduced and productivity drops. As new revenues are added, everyone's workload increases. Unfortunately, once workloads increase, staffers start complaining about working harder and demand more help. The key is to work at 110% of staff capacity, then add a new employee to drop to about 98% capacity.
3. Don't tolerate marginal performers. Staff members who do not carry their fair share of the workload decrease productivity and severely affect staff morale.
SECOND KEY: SALARY ADMINISTRATION
The next most important key to profitability is salary administration.
Consider these primary items in a salary-administration program:
- Salary caps for each job position must be in place - each job has a maximum value to the agency.
- Agency-wide raises must be 5% or 2% below projected commission growth, whichever is less.
- A common salary-review date should be used for all employees in order to avoid the upward skewing of raises.
- Consider using a bonus program for a year or two instead of giving raises:
- Set a total commission goal for the agency or a department. If the agency/department exceeds the goal, a bonus of zero percent to 7.5% of salary will be paid.
- Set a commission per employee goal for the agency or a department. If the productivity goal is exceeded, a bonus of zero percent to 7.5% will be paid.
- Set each employee's bonus, for the two items above, based on their performance review. A top performer in a department reaching both goals can get as much as 15%.
- Consider short-term staff cost savings:
- Freeze all salaries for six to 12 months.
- Have each employee take three to five unpaid vacation days per calendar quarter.
- Have two employees share a larger book of business. For example, two Personal Lines CSRs combine their books of business. One CSR works Monday through Thursday, the other works Tuesday through Friday. Each CSR then takes a 20% salary cut in return for a four-day work week.
THIRD KEY: PRODUCER/ACCOUNT EXECUTIVE COMPENSATION
Following excess staff costs as a major expenditure are the profits lost by overpaying producers.
Agencies should use the following maximum commission-payment schedules for producers: Producers handling a book of business of less than $120,000 after three years' employment should be terminated as a drain on the agency's resources and morale. Likewise, a producer handling a total book of less than $175,000 after five years should be considered marginal and terminated.
FOURTH KEY: COMMIT TO STAFF UPGRADES
Agency management must commit to constantly upgrading the quality of the agency staff:
1. Always hire a higher quality (not necessarily more experienced) individual to replace a departing employee.
2. Focus on providing a high-quality work environment.
3. Understand a manager's most important function: making employees' jobs as easy as possible to perform.
4. Commit to a 90-day 'up or out' staff upgrade program:
a. Rank all employees by quality of job performance.
b. For those at the bottom of the ranking, assess if job performance is acceptable.
c. Identify the specific areas/reasons for low performance and develop a 90-day training/education program for improvement with employee.
d. If job performance is 'unacceptable' after 90 days, terminate the employee and roll the dice on another person.
FIFTH KEY: CARRIER PLANNING
All agency managers need to remember a basic truth: An agency is only as good as its pricing and capacity. Obviously, pricing and capacity result from the relationships the agency has with its carriers. The following are 16 characteristics of high quality agency- carrier relationships:
1. business is compatible
2. agency's philosophy is to sell on behalf of companies, not to consistently find homes for accounts
3. agency is committed to street underwriting and selection of accounts
4. agency has defined system/procedure for marketing/placement
5. someone is head of marketing
6. concentration of business with carriers is high (25% to 35% lead company, 20% to 25% second company, 15% to 25% third company, 80% in five companies or less)
7. agency has real growth each year (5% to 7% net increase in client count)
8. agency assumes responsibility for loss-ratio correction
9. agency uses telephone screen with underwriting or marketing person on new business and remarketing of existing accounts
10. agency underwrites, rates, and sends proposals for new accounts with applications
11. agency holds regular face-to-face meetings with carriers to discuss specific new accounts and reviews 60-to-90 day expiration list for opportunities
12. relationships are attempted at all levels between agency personnel and branch personnel
13. agency protects carriers in a soft market from lower-than-needed pricing
14. agency selects, actively pursues, and target markets specific accounts
15. agency tracks submissions to each carrier for success
16. when seeking a new appointment, agency offers a seasoned book of business
SIXTH KEY: BUSINESS DEVELOPMENT PLANNING
All business development and growth planning must be activity-based.
Premium and commission goals are nothing more than hopes and dreams.
SEVENTH KEY: FINANCIAL BUDGETING
All agency managers need to remember a basic management tenet: There is no such thing as financial problems, only operating problems.
Financial statements are nothing more than a measurement of operating performance. If profits are low and/or cash is short, the agency's financial trouble is the effect, not the cause. The cause or problem lies somewhere in operations. This is why annual and monthly revenue and expense budgets are critical to success and why the agency's financial performance should be compared closely to industry standards. Variances in monthly performance versus the budget need to be analyzed to keep the agency on track. Review annual results for variances from the industry's results in order to keep the agency from operating with tunnel vision.
The seven keys to thriving presented here are not meant as a cure-all for agency performance, but provide a starting point for helping agencies to be run as stronger business entities.
Staff Productivity Planning
- gross commission per employee must exceed $75,000
- gross commission per Commercial Lines staff must exceed $175,000
- number of accounts per Personal Lines staff must exceed 700 accounts
- gross commission per Commercial Lines producer must exceed $225,000
- gross revenue per administrative staff must exceed $325,000
- New Accounts: 40% of first $50,000 new commission; 50% if more than $50,000 new commission is written.
- Renewals: 25% to 30% if producer writes the account; 15% to 20% on house accounts given to producer to handle.
- Minimum Size: No renewals should be paid for Personal Lines accounts as they are fully handled by the staff. A minimum account size should be set in Commercial Lines.
Eight-Point Simplified Marketing Plan
| Existing Clients : | use account-rounding and expansion |
| Prior Clients : | use disciplined system to re-solicit prior clients |
| Unsuccessful Quotes: | use disciplined system to re-solicit quotes again |
| Local Accounts : | identify five to 10 larger-than-agency's-average |
| account size - | contact and offer free insurance review |
| Referrals, Call-ins: | handle this business as it occurs - track |
| Walk-ins: | inquiries and results |
| Isolate Classes | develop expertise, develop product, line |
| Of Business : | up carrier, use sales center to contact prospects |
| Center Of Influence : | each producer develops one new center |
| | of influence a month and maintains contact |