GROW REVENUES OR SHRINK EXPENSES: HOW TO IMPROVE AGENCY PROFESSIONALISM
by Elizabeth Miller
Although we’ve seen many agencies enjoy tremendous profits over the years, Elizabeth Miller believes that the potential for growth remains very high. With strategic acquisitions, strong sales efforts, efficient processes, and good expense management, there’s no reason why agencies can’t continue to increase their profitability.
Most business professionals understand that there are only two basic ways of improving profitability: Grow revenues and/or shrink expenses. In the insurance industry, growing revenues can be done in several ways (such as acquiring a new agency, increasing rates and engaging in good, old-fashioned selling). Expense savings can come about in many ways, from improving the efficiencies obtained through automation to adjusting the compensation packages for different employees.
REVENUE GROWTH
Acquisition activity has remained a major growth strategy in the industry. During the past few years, about 13% of agencies have acquired another agency. However, the size of the acquisitions has shrunk. On average, the growth in revenue obtained from acquisitions went from $525,000 in 2000, to $550,000 a year later, peaked at $833,000 in 2002, and then dropped off significantly to slightly more than $500,000 in 2003. Although the industry is still using acquisitions as a growth strategy, the fact that average revenues from acquisitions are down substantially means that profits won’t grow as quickly as revenues. This is because the average organization takes about eight months to consolidate operations from newly acquired subsidiaries, regardless of the size of the acquisition. Because the time to consolidate remains constant, smaller acquisitions take longer to realize profitability.
We might be hitting a lull in acquisitions, as the inventory of sellers is shrinking. Recent trends show that larger firms ranked agency or book acquisitions second or third in future growth strategies, while producer recruitment clearly remains the leading strategy.
Executives in many industries operate under the assumption that bigger is better and often go to great lengths to show growth. I’d advise them, “Don’t grow for the sake of growing. A larger top line doesn’t always increase profits.” In the Independent Agency System, client sales grow the top line, but more importantly, efficiency will grow the bottom line. When servicing your client base, it’s important to understand the client’s industry and create workflows that will maximize automation, while serving the client with as few steps as possible. Agents often fail to understand the idiosyncrasies of certain industries. As you enter new markets, be aware of different service issues, and plan accordingly.
Insurance agents and brokers act as intermediaries between insurance carriers and consumers in providing risk protection. The business partners on both ends of the insurance transaction can make changes that the agent and broker must deal with. Some carrier changes might revolve around the risk appetite based on loss trends. The consumer’s needs might change as their business evolves. As a service provider, agents and brokers need to look at their books on a regular basis and be ready to shed unprofitable business. When reviewing your book, first look at the average net revenues that a client sale generates, and then examine the work required to service this type of client. Hopefully, you’ll be pleasantly surprised. If not, ask yourself why you’re writing this class of business. Be aware of the entire client relationship while you assess the profitability of writing for a certain market.
If you’re servicing a client as an accommodation for other business opportunities, review the profitability of the entire client relationship, not just a single product. Profitable revenue growth should be the main focus of agent and broker activities. Look to create a workforce that’s driven by profit, not just sales. Define, communicate, and monitor your organization’s goals and objectives clearly. If you have a small boutique agency, you need to support sales and service efforts that fall within a well-defined scope of business. If the agency is creating a new niche as a growth strategy, you must educate producers on this line and create compensation plans that will motivate producers to sell it.
Over time, complacency might set in. Many producers reach a point at which their renewal book helps them sustain a comfortable lifestyle, without the effort of trying to grow their book. Your compensation packages should continually motivate producers to increase their sales. Create a “pay-for-performance” atmosphere, while maintaining a strong support team for producers. Make the team responsible for retention, allowing producers more time to sell. P/C producers in smaller agencies tend to be jacks-of-all-trades and spend more time servicing their existing book than soliciting new business. This also holds true of very large agencies, which look at producers more as risk managers than salespeople. Their client sales calls tend to involve more consultation than selling. Medium-size firms generally have the most aggressive sales force, in which producers have historically focused equally on servicing existing clients and soliciting new business.
SHRINKING EXPENSES
Expense savings come in two forms: tangible (measurable) and intangible (unquantifiable). Tangible expense savings can be as basic as renegotiating your office supplies or as complex as reallocating space to accommodate more work in a smaller area. Intangible savings are usually more complex and generally involve how work is processed. Don’t belittle changes that you can’t quantify. More efficient operations that might not be measurable can improve your productivity significantly. Agents and brokers measure productivity by commission revenue per employee. This figure should average between $100,000 and $150,000 — and even higher in large firms.
Although the Independent Agency System has adopted a variety of automation tools during the past few years that should’ve improved productivity significantly, productivity grew only about 3% from 2002 to 2003. This is about half the 6% annual productivity gain realized between 2000 and 2002. Some sectors of the agent-broker industry even witnessed a decrease in productivity. Despite the robust capabilities of agency management systems, many agents and brokers haven’t realized productivity gains because employees, especially producers, have resisted automation. Since producers are usually the starting point of any new business transaction (“nothing happens until somebody sells something”), it’s essential for them to embrace the automation solutions available. Until producers agree to use the agency management system, it will be difficult to implement automation fully.
Integration of acquisitions can challenge many buyers. After a purchase closes, obstacles to tackle include: (1) consolidating operations; (2) blending the cultures of the two organizations; and (3) clarifying and communicating the chain of command. Although consolidation is usually the easiest to achieve and will yield the largest boost to the bottom line, many organizations try to blend the cultures and establish reporting relationships before they consolidate. This approach doesn’t work as well.
When making an acquisition, be prepared to make the tough decisions — or don’t do the deal. People are not only your most valuable asset, they’re your largest expense. You need to make good choices, announce them quickly, and then get on with the rest of the process. Yes, the consolidation of operations will usually yield an overall reduction of workforce, especially in the administrative areas — and that’s tough to face. But decreasing overhead salaries will increase profit margins. And isn’t increased profits one of the reasons you made the acquisition in the first place?
Today, we’re in the midst of a soft market. As premium hikes slow, it will become more important to boost your bottom line by shrinking expenses. Agencies that reinvested their high profits generated during the hard market in people and technology will be best positioned to produce profitable growth in the near future.
Elizabeth Miller is a vice president with Business Management Group (BMG), a consulting firm that has been helping independent agents and brokers for more than 20 years. To learn how BMG can assist you, visit www.bmgconsulting.com, call toll free at (800) 772-0208, or contact the author directly [email protected]. Reproduced, with permission, from Professional Agent magazine.