What is your profit per employee per department (PED)?
What has been your trend in PED over the last three years?
What are your PED future projections?
If you can't answer these questions, you don't have an accurate picture of how every area of your agency is doing. You have a total picture through your P&L and balance sheets, but not an accurate one for departmental decisions.
You need to know your profit in each area to make crucial decisions on issues such as pay levels, raises and bonuses, owner compensation, and expansion or reduction of an area. Without specific data, you're making decisions based on averages. This could be very costly.
It's important that all expenses of the agency be allocated to an income-producing area. Don't have an administration department for expenses only.
Agencies are given excellent guidelines to measure their total income and expenses through studies and reports by IIAA, PIA, ACORD, The Academy of Producer Insurance Studies, and others. But I haven't seen any that consider the PED. Some of these guidelines are also skewed by the use of consultants and outside contractors that agencies don't figure into their employee count.
You'll need to build your own PED model. The question I'm most often asked is, 'How do you do this?' Many agency-management systems will get you close, if your accounting area takes the time to allocate every expense and income item. The allocation of income is easy. It's the expense side that takes time, and changes regularly. I believe that the best way to produce the final product is with Excel or a similar spreadsheet. The nice thing about Excel is that it's easy to change, and can run 'what if' scenarios.
The important thing is that the PED model matches your agency's operation, not the financial sheet presentation your management system provides. The majority of agency owners and managers agree with the need for this information, but many feel that it's too hard to get the data, or simply divide all expenses up to get some kind of picture. Don't settle for this!
The first step is to decide how you're going to allocate your expenses. This should be accomplished by the owners and department managers meeting together. An example of a minimal breakdown is:
- Commercial Lines
- Personal Lines
- Life-Health
An example of an average breakdown is:
- Commercial Lines
- Small Commercial Lines or BOP area
- Personal Lines
- Individual Life, Disability, and so on
- Group & Pension products
Next, decide on the method to use for each expense item. A majority of the expenses will be classified by headcount in each area. But many agencies have people who work in and would be 'expensed' to more than one area, such as the receptionist, claims person, office manager, accounting, and producer. You'll need to allocate where these people are spending their time. For example, is the receptionist on the phone 60% of the time for Commercial Lines, 35% for Personal Lines, and 5% for Life?
Do the same with all 'inside' people. As for producers who sell in more than one area, allocate their expenses by income produced per division (for example, 60% Personal Lines, 30% Life, and 10% BOP). Once you go through this process, you'll have a complete allocation for everyone. The majority of general expenses and specific employee costs will be allocated by this head count. Examples of general expenses include utilities, rent or occupancy costs, office supplies, and computers. Other expenses might be allocated as follows:
Advertising-by agency income percentages:
Commercial Lines 65%
Personal Lines 25%
Life 20%
Buyout costs-by what you purchased. A Commercial Lines agency goes 100% Commercial Lines.
Owners perks-by where the owner is allocated in the head count.
A PED system will take some time to set up and maintain, but it's time well spent. You'll have accurate data on which to base your decisions. Without it, you'll be guessing. With it, you'll be able to answer questions such as these:
- Does a producer deserve a higher commission?
- Should a department add another staff person?
- Is my small Commercial Lines business profitable?
- What area of the agency is most profitable?
- In what area of the agency are profits rising? Declining? Why?
If you don't have the knowledge internally to set up a PED system, contact someone who can help or simply do it for you. You'll then have a worksheet to follow and adjust as necessary. The costs will vary depending on the size and complexity of your agency.
Another side benefit is that you'll have the data you need to assess your agency's value, and a clearer idea of how to improve.