| WHAT MAKES A GREAT FIRM by Catherine Oak Focus on these 12 key characteristics of to improve your agency’s operations – and increase its value. In my years of working with insurance agencies throughout the world, I’ve distilled the characteristics that separate great firms from mediocre ones. These key characteristics I’m about to describe apply to: -
Buyers of agencies -
Owners who to want to maximize their return. -
Insurance company executives who want to dedicate their resources to the best agencies with which they have appointments and/or want to appoint quality new agencies. 1. A GROWING BUSINESS If you aren’t growing, you aren’t going to survive. New business is the lifeblood of a good firm. Few people are interested in a firm that can’t increase its revenues through new business each year to at least exceed increased costs, attrition, and meet volume commitments. Insurance companies want to see new business growth, not just overall revenue growth. Usually an inability to grow the agency through its own new business efforts is a reflection of poor management. A firm that can’t grow itself should not acquire another book or firm to acquire necessary growth. Owners must be able to first manage growth of their own firm before they should acquire someone else’s book. Today growth of 10% to 20% (net of lost accounts) is excellent due to tough competition and continued market conditions. 2. AN EFFECTIVE SALES AND BUSINESS PLAN Planning the agency’s sales activities and business goals for the coming year is extremely important. At least once a year, the management team should go off-site for a planning session to determine a minimum of five or six key goals for the coming year. Management should monitor the agency’s progress in attaining those goals at least quarterly. 3. EFFECTIVE SALES MANAGEMENT Once you’ve set an overall growth plan, develop specific activities to accomplish this growth. Break these goals down by producer and by department to communicate specific standards and measure performance. Good sales management activities include: -
Monitoring individual producer performance at least monthly against standards and objectives. -
Holding effective, regularly scheduled sales meetings. -
Communicating to producers what the markets want the agency to write and the guidelines to follow. -
Sharing what types of accounts have been successfully written. These activities need to be managed either by agency principals or a dedicated sales manager. The principals can probably do the job without a full-time sales manager as long as standards are set for each producer with an effective communication and monitoring process. If there’s no sales manager, some agencies assign new producers or producers who haven’t yet validated to specific individuals such as owners or key producers to manage their efforts. In this way, the sales management burden doesn’t fall entirely on the shoulders of one owner who probably also needs time to work their own accounts 4. GOOD MARKET RELATIONSHIPS The elements of good market relations include: Consultants recommend not concentrating too much volume with any one carrier (e.g., not more than 25% of total volume). Bear in mind that most insurance companies might want a firm to have more than 25% of its volume placed with them; however, the percentage varies based on the size of the firm. The larger the firm, the lower the percentage of volume the carrier would expect to have. Carriers might expect 30% to 40% of an agency’s volume if the firm is small in order to attain preferred status or clout with that market. 5. PRODUCTIVE EMPLOYEES The agency’s productivity needs to be at least average, but preferably higher compared to firms of its size. Management needs to attain the standards that fit the firm so that a good comparison can be made – and communicated to all employees, especially producers and CSRs. The number of accounts and commission volume needed to be average or well-run should be understood by each person and should also alert management to the need for additional staff. If expected levels of performance are exceeded, management should recognize and reward above-average performance contributions as a way of encouraging employees to achieve higher levels of performance. Employees usually have two major complaints: 6. A STRONG ORGANIZATIONAL STRUCTURE How well you organize your agency will affect its success. A streamlined organizational structure allows you to use the talents of the best individuals properly, delegate service activities to the least costly, qualified employee, and support producers with good technicians, freeing up their time to sell new prospects rather service existing customers. The best structure for service support for producers depends on the book mix, size of accounts and expertise of the staff. The most common types have some version or combinations of these elements -
Alphabet splits -
Large versus small accounts persons -
The producer-unit concept -
Specialty units or departments 7. GOOD PERSONNEL MANAGEMENT Because they’re usually the best salespersons in the organization, many owners make terrible administrators Owners should perform a cost-benefit analysis of the need for an office manager to handle many of the owners’ administrative activities. Owners might find that the agency would profit more by hiring someone to handle administrative matters rather than deny themselves time to produce new business or service accounts. Also, as the firm grows, supervisors or managers of each department should be assigned management duties to relieve owners of many day-to-day management activities. The owners’ time should be geared to more strategic management duties. Good personnel practices for an agency include: -
Delegation of authority and responsibilities to middle managers. -
Annual (or more frequent) performance reviews using a critique form. -
Written job descriptions and performance standards for each employee. -
A flexible work atmosphere, (e.g., flex time, part-time status for new mothers, etc.) -
An office manager, when affordable, to handle administrative items and other duties, such as automation, accounting, or personnel. Adopting these practices will put you ahead of the competition and should improve morale and make employees more satisfied with their jobs. 8. AN EFFECTIVE PRODUCER COMPENSATION PLAN Compensation plans should help the owners meet certain goals, attain specified profit levels, and encourage producers to write more new business of the types desired by management and the firm’s markets. The easiest way to change the focus of a producer and their efforts is by altering the compensation plan to fit the direction management wants the producer to head (i.e., write larger Commercial accounts, or certain classes of business, such as manufacturers). Although these changes might also cause the agency to lose producers, because all producers need to be headed in the right direction, changes in the compensation plan might be necessary. Grandfathering an existing compensation plan and applying it to new business is one way to ease producers into a new plan. You can either implement grandfathering on an indefinite basis or keep it in place for just a few years. Encourage producers to delegate as much service work on their accounts as possible, freeing up their time for new production. Many firms are now paying producers less commission or no commission for writing or servicing small Commercial or Personal Lines accounts. This might encourage them to delegate this work to CSRs so they can spend their time writing larger accounts. Essential producers need to be tied in to protect the agency’s book of business and be attractive to a third party in the event of a sale, merger, or cluster decision. Producers should sign producer agreements with covenants not-to-compete. Non-piracy language should also be a part of these agreements should the covenant not hold up. All employees (especially CSRs and accounting personnel) should be required to sign non-piracy agreements to protect the book if these individuals join another firm. Providing consideration, such as vesting or stock options, can also help uphold covenants in a contract 9. EQUITABLE OWNER COMPENSATION PLAN The agency will need an equitable owner compensation plan to keep peace among owners as the firm grows and their contributions change over time. Some owners might slow down as they near retirement or when they burn out. Structure the plan so that the owners’ salary portion of compensation rewards them for their contributions to strategic management and production. Use profit as a vehicle used to reward outstanding contributions and/or provide owners a return on their investment. This profit is usually paid to owners in the form of bonuses at year end. If salaries are based on the contribution of the owner, it’s common to distribute profit based on ownership percentage. More progressive agencies are also basing profit distributions on contributions made by owners because the stock value will continue to improve over time for all owners, if others are contributing and rewarded appropriately. 10. FINANCIAL MANAGEMENT EXPERTISE Management needs to be financially astute to manage the firm’s finances properly, control expenses, and create a meaningful annual budget. If the owners lack these capabilities they might hire a top notch accounting manager or controller to fill in these gaps, when affordable to the firm. If the owners are better at sales than financial management, it might be better for the agency to have someone other than the owners take on this responsibility. Certain key ratios need to be calculated and expenses examined on a regular basis, to determine if the agency is doing better or worse than in the past. Management should also compare the firm to agencies of the same size and type to examine productivity, liquidity, cash flow, leverage, and return on investment. Put expense controls in place so that at least once a month management can spot potential problems. Set an annual budget and monitor it throughout the year. Many agencies today are also trying to implement profit center accounting by department to manage profitability by lines of business and types of accounts written, so that they can focus their efforts effectively. Agencies need to pay closer attention to collections. It’s often difficult to collect audit premiums from insureds after the policy period is over, and clients are also paying their bills at a much slower rate. Be aware of clients that could become collection problems and try to use financing arrangements or direct bill Commercial clients that continue to have payment problems. 11. CONCENTRATION ON LARGER ACCOUNTS AND A DIVERSIFIED BOOK The largest profit drain on a firm comes from paying producers for accounts that they don’t handle. The key is to pay producers based on the job they perform. If CSRs do all of the service work, producers don’t deserve renewal commissions, especially after the accounts are sold, (Personal Lines, for example). Paying producers to handle small Commercial accounts can also be a profit drain. The average firm has 35% to 50% of its Commercial accounts accounting for only 5% to 15% percent of total P/C commission and fee income. Small accounts are usually defined as accounts of $500 to $1,000 in commission or less — which usually include BOP accounts. Producers should focus their efforts on larger Commercial accounts, whenever possible. The average industry commission for a Commercial lines account comes to $1,500. A Commercial Lines book focused on medium to large accounts, rather than small Commercial, Personal Lines, Life or Group business appears the most attractive to agency buyers today. However, it’s also important not to “put too many eggs in one basket.” An agency that’s too specialized can end up in trouble if a market dries up or the specialty finds an alternative to placing the business with that firm. More and more agencies are trying to expand into a variety of niches, association programs, joint ventures, and/or financial services. 12. A WORKING PERPETUATION PLAN Owners should begin exploring perpetuation prospects while they’re still young. Who will their successors be? A good perpetuation plan needs candidates who are able to: -
Assume the retiring shareholders’ relationships with the agency’s top accounts and markets. -
Build relationships with employees, especially long-term ones. -
Manage the firm at a profit. -
Sell new business to provide the growth the agency needs. If perpetuation candidates exist for internal perpetuation, a good consultant can help the owners analyze the various options, along with the tax consequences. Determining which method or combination of methods to perpetuate the firm and establish the fair market value isn’t as difficult as finding the appropriate candidate(s) who is (are) capable of extending the life of the agency. SUMMARY Management should use these 12 key characteristics of a great agency to focus on improving operations and increasing the value of the firm to its owners.
Buyers, as well as insurance company personnel, who wish to be associated with great agencies should determine whether the prospects they’re evaluating show the characteristics that signify outstanding service. If so, the purchase or appointment of the firm will have a better chance at meeting expectations. Catherine Oak is a principal with Oak & Associates, P.O. Box 2047, Glen Ellen, CA 95442, Phone (707) 935-6565, Fax (707) 935-6515, e-mail [email protected], or visit www.oakandassociates.com.
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