NEW BEGINNINGS
I'm not quite sure why, but for me, fall is the time of year that signals new beginnings. Maybe it's because students are going back to school, the leaves are turning a dramatic new color, and there's high hope for the new football season. Maybe it's the fresh, cool air that greets us first thing in the morning. Perhaps it's simply because, at our agency, fall is the time of year we begin our annual planning process.
We're not jumping the gun, exactly. It's more like getting in a little pre-season practice. Actually, updating our annual business plan in late September and early October began as a survival tactic. Even though our agency was a forward-thinking organization (we knew precisely where we had been, where we were at any given time, and exactly where we wanted to be in the future), in years past all the data that backed up those facts came directly from the agency's management team.
Experience reminded some of us that come January, each profit center manager (Commercial, Personal, and Life/Benefits) would be presented with goals developed by the management team. We were always a little mystified at how those goals evolved. Management explained, 'It's simple. Here's what your profit center did last year, here are your year-to-date results, and if you just keep doing what you've been doing-plus just a little extra-you'll have it made!'
See what I mean about survival? To begin with, I wasn't even sure how to respond, much less ask intelligent questions about their goals. But if I didn't ASK those questions, my input at our monthly management sessions would probably continue to consist of excuses as to why our profit center either grossly exceeded these mysterious goals or fell yards short.
STEP ONE
We knew that survival would mean getting a head start on certain facts and variables constituting each of our profit centers: In the past two years, what was our rate of growth, and how much written premium and commission revenue did we actually have? What was the average commission for new and renewal business? How many policies did we have in force, and how much did our average policy size change? Of the business in force by year's end, how much could we expect to be available for renewal in the next year? What portion of the agency's compensation expenses had been charged to each profit center as a fair and equitable share of management, sales, service, and support salaries and employee benefit expenses? And what was each profit center's allotment of the agency's sales, operating, and administrative expenses? Today we refer to this activity as Step One in our business planning process.
STEP TWO
What should each profit center manager do with this new-found knowledge? To begin with, we shared it with everyone in our respective profit centers during the first of our three planning meetings. Planning meeting 1 was announced as an all-day off-site strategy session. In addition to sharing profit center facts and sales and service achievements (and shortcomings), the main purpose of this meeting was to give everyone an opportunity to brainstorm and share the ideas, niches, and projects they wanted to consider for the upcoming year.
Planning meeting 2 consisted of each individual meeting one-on-one with the manager at various times throughout the next two weeks. In these sessions, each sales, service, and support person selected the projects (from the various project ideas considered in planning meeting 1) that he or she personally wanted to include in their individual strategic marketing plans.
In preparation for planning meeting 3, each profit center manager integrated each of the individual plans into the profit center's strategic marketing plan projects report. No more mysterious goals from the top-down. Bottom-up business planning gave our agency a method by which each person in the agency developed a specific area of expertise. The agency's strategic marketing plan projects report was developed simply by combining the Commercial, Personal, and life/benefits profit center strategic marketing plan project reports.
No more guesswork from the top down. Bottom-up business planning is easier and definitely more accurate. It provides an accountability trail for each individual contributing to the plan. These three planning meetings are referred to as Step Two in the business planning process.
STEP THREE
In Step Three, the combined production goals from each profit center's strategic marketing plan projects report became the goals for Year 1 on our Five-Year Human Resource Strategies report of the profit center. Using these goals as a guide together with past results, we can now accurately project growth for Years 2, 3, 4, and 5.
This report was designed to help plan the positions that will be needed to service, manage, and support the production goals. Projecting profit center growth for the next five years isn't difficult. What IS difficult is knowing how many people will be needed to support that growth. Planning adequate staff levels can be perplexing, as we found when we attempted to measure our agency against peer agency studies. This was particularly true since, as is often the case, the agencies making up the various agency peer studies are seldom much like our agency. Some of the peer agencies may target jumbo Commercial accounts with upscale Personal Lines clients having an average policy five times larger than our average. But then on the other hand, we fully use our agency management system-a direct outgrowth of our compensation plan for service positions. Service teams are directly rewarded when they discover, test, and implement methods for improved productivity.
STEP FOUR
This step in the planning process is simply a compilation of facts from Steps One, Two, and Three. This report simply transfers our bottom-up facts to the five-year revenue/sales goals report of each profit center:
- New and Total Planned Written Premium
- New and Total Planned Commission Revenue
- New and Total Planned Policies In Force
STEP FIVE
This is the most crucial step in the planning process. Since compensation is an agency's single largest expense, the number of positions planned on the five-year human resource strategies report could spell disaster. The agency management team realized that an exceptional compensation plan needed to be developed to reward everyone directly for performance. Automatic annual cost of living adjustments (COLAs) were mortally wounding the agency and did little or nothing to motivate our people.
Professional development and personal income potential would be important keys to the agency's success. In Step Five, our five-year compensation and career path models gave the agency an opportunity to play out a multitude of what-if scenarios in budgeting long-term compensation expenses.
When compensation models were completed for all positions projected on each profit center's five-year human resource strategies report, the agency could see whether the first what-if compensation scenarios provided enough personal income potential to attract top candidates and then keep them as their income and career path opportunities surged. Even more important, it was determined whether the projected bottom-line result in return on revenue would meet management's goal.
STEP SIX
By the sixth step, we had our agency's big picture clearly in view on our five-year pro forma projections report. Our bottom-up business plan clearly presented the compounded profit potential of our pro-growth Commercial, Personal, and life/benefits profit centers.
These goals were not 'pie-in-the-sky,' either. They were developed using a bottom-up business-planning approach. Our plan began with the very people who, for reasons of their own, would implement the goals, projects, strategies, and activities of the agency as if they were their own.
PTERODACTYLS TO PEREGRINES
It has become abundantly clear that one of the things the tumultuous 1980s forced on the traditional world of insurance was innovation. And the economic turmoil of this last decade is giving birth to a fundamentally new kind of agency, as different from what preceded it as a peregrine is from a pterodactyl.
We've reinforced our six-step framework for agency success planning process by continuing to focus on bottom-up business planning. This approach redefined management's role. Instead of acting as commanding officers issuing instructions, the management team took on twin roles. One is that of a venture capitalist, dealing with clients and companies, watching the numbers, allocating resources. The other is that of head coach and coordinator, guiding employees in the development and implementation of their own individual strategic marketing plans. Employees need to know and understand that their activities are important to the team effort and then make sure they're working from the agency's playbook.
CREATING AN AGENCY OF BUSINESS PEOPLE
Employees should be trained to understand their personal contribution to the agency's position every month. They can then be eligible each quarter for bonuses pegged to specific goals such as new revenue, retention ratio, increasing average policy size, average commission, improved productivity, and, especially, return on revenue.
In the meantime, employees must be directly involved in the strategies of the game plan as well as in comparing projections to actual results. This innovation works! Many agencies are beginning to recognize that they can no longer afford for employees just to service and/or sell. Agency principals realize they also need to coach their employees on how to make a profit. That point really hit home when we were reminded that there's never been a team that became very impressive while only the head coach had the playbook.
TOUGHER TIMES AHEAD
Agencies are being warned to expect some pretty tough times in the future, given the following scenario:
- The continuing decline of pre-tax profit and rate of growth
- The continuing soft market
- Further commission reductions
- The slower rate of increase of revenues per employee than the increase in compensation per person
- Declining contingent and investment income
- Massive consumer activist pressure on governing bodies
IT DOESN'T HAVE TO BE ALL DOOM AND GLOOM
Many agencies out there are doing a lot of things right-particularly those with a playbook that clearly identifies the necessary players and what's in it for them when their individual activities contribute to a winning season.
Generally, top-down business plans were created to attract a new company or to convince a banker that the agency would be a good credit risk. However, after a couple of so-so seasons with several players on the injured list (or who became free agents and went with another agency team), agency (team) owners might want to consider a little more player involvement in team strategies.
A bottom-up business plan distinctly defines the hopes, dreams, and aspirations of every player on the team. Since their input helped to define the strategies in the playbook, team members are more clearly focused on the team objective-and thus more likely to have a string of winning seasons.