Learn what to expect, and how to grow, as you approach milestones in premium volume.
Much of management consultant work involves helping agencies break through the barriers to natural growth that they experience at different stages of development. As a rule of thumb, agencies find it particularly difficult to break through the $1 million, $2 million, and $3 million revenue marks. Once the $3 million ceiling has been broken, most agencies seem to be able to grow to $10 million without major management changes.
These revenue markers are arbitrary. Some agents don’t hit the first ceiling until they’ve grown to almost $1.5 million. Others might find themselves acquiring other agencies and not feel the severity of the first ceiling until they’re over $2 million. But if an agency grows naturally (by writing more business each year), the $1 million, $2 million and $3 million ceilings are correct.
THE MOM AND POP SHOP AGENCIES UP TO $1 MILLION
An agent starts his own agency or assumes a very small book of business to start his career, using the revenues to support his family. As the business is put on the books he adds staff. He’s the agent and decision-maker, with any employees working at his direction. As the business expands, he adds more people. If it grows large enough, his primary assistants become lead workers, supervisors, or managers. However, the roles are the same: he directs they perform. He controls relationships with customers and carriers.
When the agency nears $1 million in revenue, the agent feels quite successful. He’s now making a good living. His office staff can handle the paperwork something that he doesn’t enjoy anyway. But he’s also beginning to get uncomfortable. With 300-500 Commercial clients and the same number of Personal clients, he feels that he’s losing control. Things happen about which he isn’t informed until a crisis occurs. Some customers leave because they don’t believe that he’s paying attention to them any longer. With 10-15 employees, he’s having a tough time trying to keep harmony in the office. He sometimes feels more like a babysitter than an agency owner, and it seems that whenever a problem occurs no one will correct it or make a decision without his approval. The owner’s sales time is the part of the job that he enjoys most has diminished and he rarely has time to sell or even visit clients because of all his responsibilities.
The agency has come into contact with the first “ceiling” that must be breached to transition from a Mom and Pop Shop to a Medium-Size Agency. The change starts with a shift in the organizational view of the owner. If this change doesn’t occur, the agency might still expand for a while. However, the growth will be fraught with problems that will frustrate the owner, employees, and clients alike.
To break through the $1 million ceiling, an agency must assign supervisory positions on a departmental level. Day-to-day decisions become the responsibility of supervisors, who usually remain lead workers with their workload diminished to permit time for management duties. The owner remains responsible for sales and for company relationships. He still makes the major decisions in the agency and is informed about everything that goes on, but he isn’t involved directly in every decision and problem. At this stage, progressive agencies also recruit additional sales staff.
The transfer of day-to-day workflow from the owner to the supervisors of Personal Lines and Commercial Lines, together with the re-invigoration of sales through the owner and hired producers, permits the agency to make the first transition from a small to medium agency business. This process works well until the $2 million level nears at which point a new set of problems and stresses occur.
MEDIUM-SIZED AGENCY TO PROFESSIONAL AGENCY: $2 MILLION
At $2 million more if growth is through acquisition the owner’s compensation should no longer be an issue (unless there are three or more principals). However, the owner’s habit of pocketing any excess agency income has begun causing problems. Financial needs for such items as computer systems are arising that require substantial capital. If the owner feels that all the agency’s profits are rightfully his, he sees every expenditure as a personal loss and believes that he’s “giving something up” to sponsor the agency. This mind-set is the first thing that must change when growing from a Medium-Sized agency to a Professional Agency.
The owner must compensate himself for his services in the same way that he would pay an outside hire with the same responsibilities. His ownership benefits should lie in the agency’s growing value. This might not come to him in cash immediately, but it keeps accruing and permits the agency to develop while simultaneously increasing its value for the owner.
A major trap in an agency’s development can be triggered at the point when some owners realize that underpaying them is not an issue overpaying them is. Although the owner might not admit it, sooner or later he’ll realize that his sales results don’t justify his compensation. If he gives up the management responsibilities that he should delegate as the agency grows, he might not be able to justify his compensation as a manager. The solution to this dilemma: choose the responsibility in the agency for which he is best suited. We’ve seen successful agencies in which the owner is the Personal Lines manager because that’s the role in which he can provide the greatest return to the agency. As these agencies develop, the owner is paid as both the CEO making the decisions for the agency’s future and strategic direction and as a department head with others responsible for daily agency management. Unfortunately, too many owners assume general management or sales management roles for which they’re not suited due to some combination of ego, the need to remain the key manager in the agency, and to justify high compensation. All too often, the results prove this premise of agency management: The major opportunities in an agency lie within its owner(s) and so do its limitations!
Once the owner shifts the basis of his compensation from needs to the value of the roles he fills, he can professionalize his staff by assigning full-time managers. For example, the bookkeeper should become a Financial Manager responsible for maintenance of cash, monitoring of budgets, and billings and collections. Balancing checkbooks, justifying accounts, and paying bills should be assigned to a clerical employee.
Service management should also become a full time job. The Personal Lines and Commercial Lines Managers become the agency’s second line of defense for handling problems or disputes. They should also be responsible for hiring, firing, and evaluating their employees and for managing workflow. Finally, the Sales Manager has the responsibility for growing the agency’s production.
At the $2 million revenue level, agencies should already be well into the planning process, or at least started to tackle it. In a smaller agency, strategic and tactical planning focuses on how to sell the next policy and to whom. At $2 million, the focus must shift to retention management and sales management. The Personal and Commercial Lines Managers are responsible for retaining customers and revenues. The Sales Manager (whether the owner or a full-time professional) has the responsibility for hiring and managing a sales force whose activities generate a steady flow of submissions that turn into growth sales.
At this stage, the owner concentrates on the activities that he both enjoys most and that make his role the most productive whether in sales, carrier relations, or maintenance of the agency’s largest clients. The owner also spearheads the planning process and directs the course of the agency.
FROM PROFESSIONAL AGENCY TO LARGE AGENCY: $3 MILLION +
Agencies that successfully transition from Medium-Size to Professional Agencies find that their growth accelerates between $2 million and $3 million. Adding a Board of Directors (both internal and external) who share the goals of growth and continued financial health for the agency will play a key role in breaking through this final barrier. Departments become divisions, management is rewarded with incentives based on achieving and exceeding their goals for growth, and owners enjoy profits above those projected.
Acquisitions add a new ingredient to the evolution of agencies. Earlier, we indicated that the revenue ceilings that measure agency development are arbitrary because growth through acquisition is artificial. A small Mom and Pop agency doesn’t mature when it doubles in size through merger or acquisition it simply becomes a larger “small” agency.
A larger agency that has not managed the transition from “small” to “medium” or from “medium” to “professional” can be larger, but will find that their development has ceased and any further growth is very difficult. The solution is to address the management needed in the agency once an acquisition is made. An organizational change from a business combination creates an excellent opportunity to meld personnel while developing the management staff of the host agency. When you consider an acquisition or merger, don’t focus exclusively on the absorption of the book of business. Look at the sales volume of the agency after the association and identify the management roles needed in an organization of this size.
At $3 million in revenue with 30+ employees, an agency is on the verge of self-perpetuation. Large agencies sell out only if their owners prefer not to perpetuate they aren’t forced to sell. An agency is ready for self-perpetuation when professional management is already in place, one or more owners want to retire, and the mechanism for their buy-out is already in place, as are their successors.
The glass ceilings in an agency’s growth need not be barriers. If recognized and addressed, your organization can mature and develop in tandem with its revenue growth and the results will be management commensurate with the agency’s maturity at every stage.