FOUR WAYS TO CUT COSTS AND INCREASE PROFITS
by Bill Schoeffler and Catherine Oak
There’s more of an emphasis on watching expenses today in order to return a reasonable profit. Many owners feel that they run a tight ship; however, their proximity to the action might preclude an impartial analysis. All agencies would benefit from a review of these four areas outlined in this document by Bill Schoeffler and Catherine Oak.
Although many agencies have posted good growth during the past few years, the tide is turning. Despite their growth, most agencies have seen a decrease in their profit margin. The typical profit margin of 20% to 30% 10 years ago is more like 15% to 25% today. The main reason why most agencies are less profitable today is that premiums have decreased, together with the associated commissions earned. At the same time, the costs of running an agency have gone up.
HIRING
Don’t hire new people until you must. We often see agencies overstaffing. Sometimes, this is deliberate; the owners are staffing for growth or have found a great employee that they don’t want to pass up. Other times the overstaffing is something that the owners aren’t not aware of. It’s essential to review industry standards for performance.
The benchmark should be the amount of commissions and accounts handled by firms that write similar sized accounts. Analyze the workload by desk as well, not just overall volumes for the department. Don’t wait until the producers or staff complain to determine if additional employees need to be hired.
Don’t maintain an overstaffing condition in the firm. It’s far better to have fewer, better employees and pay them more than average, than to have too many mediocre or just average employees. Agencies that have the right number of good people show a favorable bottom line and need less management
PRODUCER COMPENSATION
Pay producers to produce. Producers should be motivated to produce from within themselves. It’s very difficult to train someone to be good in sales. It’s far easier to train a person in insurance who has a natural sales ability. Regardless, it’s necessary to create a motivating environment in the agency for sales. The agency’s philosophy should be apparent in its compensation structure not only for producers, but for all employees.
It’s important for all agencies to be growing. Producers create new sales — the lifeblood of the agency. Producers should receive a higher commission on new business than on renewal. This type of compensation plan indicates that the producers’ main role is to bring in new sales. If retention is the major thrust of the firm, then a level commission for new and renewal or even a higher commission on renewal might be warranted.
The key to productivity is to motivate producers, through your compensation plan and structure, to delegate service work naturally after an account is written. They should be focusing their energies on new prospects, presentations, and closing. The CSR staff should handle the service work and a good deal of the marketing.
AUTOMATION
Encourage proper utilization of automation. There’s a huge difference between being “computerized” and truly “automated.” Some agencies use the computer as simply a typewriter and accounting tool. Others are actively using e-mail, faxing from the computer, interfacing with their carriers, scanning data — and some are even transactional filing. There’s a world of difference.
Cost cutting and improved efficiency requires the proper use of the computer’s main functions. Get ongoing training from the firm’s vendor, outside sources, or an in-house manager. Place a limit on the amount of data that’s put into the computer to what’s needed. In Personal Lines for example, if data can’t be uploaded to the insurance companies and another terminal must be used, or data must be re-entered, it might not make sense to have all the data in the agency’s system and again in another computer. Do what makes sense from a cost and efficiency standpoint.
It’s important to analyze your agency’s workflow at regular intervals. Automation was supposed to make workflow more efficient with fewer people. Often this is not the case, perhaps due to the way that the firm manages these workflow processes.
For example, in Commercial Lines, we often see agencies re-entering data several times: Once to create a proposal, once to do an ACORD form, and sometimes even a third time, if the producer requires a special summary of insurance. If the data can’t be reconfigured and entered only once, re-examine these items and their usefulness. Some software integrates data entry so that it’s entered only once for all functions.
In agencies that use transactional filing, there might be another step: Having to log in each item after it’s processed and sent to the agency from the carrier. This is so it can be found again by date, since there no longer is a central file. In these cases, the agency can end up being less efficient, even though it’s automated. Good management of automation and its processes is essential.
Some agencies have had to hire Data Processing Managers to keep up with all the changes in automation and to have someone concentrate on the problems, training, upgrades, back-up, etc. If an agency has done this, as well as employed data entry persons, its personnel costs might be higher than when the firm wasn’t automated. The key is to make sure that what’s being done is cost-effective and helps the agency achieve its goals of lower costs and more profit.
TARKET MARKETING
Watch those advertising dollars and improve your hit ratio. Most agencies today realize that to succeed and grow they need to specialize. Astute firms are re-examining their advertising activities, including yellow pages, telemarketing, direct mail, and trade journal ads.
Improving your hit ratio is the key to cutting costs and improving profitability. With this in mind, it’s important to target the advertising and telemarketing efforts to the type of business that your producers and carriers want to write.
A large Yellow Pages ad might be a waste of money for firms that specialize in Commercial Lines and get most of the new business from referrals and other standard sales techniques. Instead, advertise in trade journals of the types of clients that the firm targets. Become an industry expert by attending conventions as a speaker or run a booth at the trade show. Association endorsements are great, as long as you negotiate a reasonable incentive with the association.
CONCLUSION
Because growth is difficult today and profit margins are much lower, owners and managers need to be more astute in finding ways to improve the bottom line. Work smarter, not harder by concentrating on the guidelines in this article — and you’ll enjoy lower costs and higher profits.
Bill Schoeffler, CIC, and Catherine Oak, CIC, CRM, AAI are partners in the consulting firm, Oak & Associates, based in Northern California. The firm specializes in financial and management consulting for independent insurance agencies, including valuations, mergers acquisitions, clusters, sales and marketing planning as well as perpetuation planning. They can be reached at (707) 936-6565 or by e-mail at [email protected].