The benefits, drawbacks, and formation of a marketing cluster.
Clustering has been around for some time. Attorneys, doctors, and CPAs have used clusters to reduce costs, increase efficiency, and generate additional profits. There are many types of clusters, and a cluster that’s right for one group of businesses isn’t necessarily right for another. This article focuses on the marketing cluster.
A marketing cluster is a single entity created by a group of agents for the purpose of combining volume and placing activities. It allows each agency to retain its individual identity, while providing a single source of business for the insurance companies. In other words, six agencies, each with a volume of $1.5 million in premium, combine to form an entity that will contract with insurance companies with a volume of $9 million. Each agency then becomes a “sub-producer” of the cluster. As far as each agency’s customers are concerned, it’s business as usual.
There are many reasons for clustering today. Decreases in premiums – caused by a prolonged soft market, reductions in commissions by the companies, and a weak economy – have caused agency profit margins The volume requirements of national (and some regional) carriers is too high for many agents to meet. Mass marketing, risk retention groups, and self-funded programs are virtually impossible for the average agency to form or compete against.
THE UPSIDE
Forming a marketing cluster offers many advantages, some obvious and others more obscure:
- Increased Premium Volume. Most companies today have set thresholds for profit-sharing out of reach for many agencies. Also, companies have determined that greater profits are realized by dealing with a few large-volume agencies than many small-volume agencies. It’s wrong, however, to think that these large volumes will entice a company to write a bad piece of business. While the agency’s volume will lead to some power with a carrier, the days of “cramming it down the companies’ throats” are over.
- Increased Contingencies, Override Commissions, and Underwriting Authority. All are possible and are entertained by some companies. This can lead to thousands of dollars in additional income for the individual agencies.
- More Purchasing Power. Agencies can reduce their individual costs of purchasing office supplies, automation hardware and software, and even insurance. Finance companies are willing to share in profits for substantial amounts of premiums financed through them.
- Reduced Education Costs. Many clusters are able to hire or employ people to provide sales training, continuing education programs, consulting, and loss control personnel at a much reduced price.
- Shared Database Information Services. As a single entity, the cluster can purchase database programs such as Silver Plume and allow the individual offices to access them. This also applies to market-finder information for Property/Casualty and Group and Life products.
- Perpetuation. Many agency owners have yet to establish a plan of perpetuation. The marketing cluster can include in its contract a provision for purchasing agents and agencies in case of death, disability, or retirement. The terms of the buyout can be determined in advance, giving the individual owners peace of mind.
- Another Profit Center. Once the cluster is in place, the cluster owners might decide to “franchise” the concept: in other words, attracting agencies that have lost or are losing their markets and customers, and allowing them to become non-owner members of the cluster, placing business through the cluster for a fee. Of course, the contracts and benefits derived from the cluster would be different for the non-owner.
THE DOWNSIDE
Clustering also has a number of potential drawbacks:
- The Need for Standardization. Many of the clusters I’ve been associated with lost some of their initial members because they continued to want things done their way. Consistency in application submissions and premium payment are a must, and that can be a problem for some.
- Loss of Control. Placement is done by a marketing person employed by the cluster. There must be a consistent approach to the methods of placing business, using markets in specific situations, and so forth. Although individual cluster members can make suggestion, ultimate control rests with the cluster’s placer.
- Need for Growth. A cluster is not a vehicle for active retirement. That is, agencies should not join in a marketing cluster as a way of renewing existing business and writing new business in response to phone calls. Volume growth requirements (and the onuses and profit sharing associated with them) means that cluster partners will require all agencies produce a substantial volume of new business for the cluster companies.
- Personality differences. The most significant problem is adjusting to the personalities of each agency owner in the cluster. The egos of each must bow before the good of the whole. In most cases, it’s important that a facilitator be part of the original clustering and that, once the cluster is formed, a committee be appointed to resolve differences.
FORMING A CLUSTER
Once agents have discussed the possibility of the forming a cluster, they need to sit down and discuss the reasons and goals of the cluster itself. The meeting should begin by asking these questions:
- What does each participant hope to gain from this association?
- Which types of business (Personal, Commercial, Life & Group, Surplus Lines, etc.) will the cluster market and which will the individual agencies retain?
- Which companies does each agency represent, and are they willing and able to share those markets with the rest of the members?
- Where will the cluster office be located?
- What volumes will each of the participating agencies commit to the cluster?
Once there’s an agreement on these issues, the next step is to start building the infrastructure of the entity. The participants will need to:
- Create and sign a “Letter of Intent to Cluster.”
- List specific objectives for forming the cluster.
- Create a Mission Statement.
- Collect premium and loss information for each member by type of business and company.
- Assemble information on personnel, automation, and other significant areas for each individual agency. Have each agency create a profile using a standardized format.
- Decide on the number of participants in the cluster and the criteria for accepting a new member.
- Determine the services the cluster will provide its members.
- Set the number and qualifications of personnel, together with job descriptions, job standards, and salaries.
- Outline current and future responsibilities of the member agencies. This should address, but not be limited to, volumes, future meetings, management responsibilities, and initial funding.
- Select the form the cluster will assume. I’ve found that a partnership is preferable to a corporation in many instances.
- Begin preliminary work on a contract. Always select an attorney and CPA to review your initial work.
- Prepare pro-forma and detailed income and expense projections. This is one of the most important steps. It’s essential not to underfund the cluster and to set reasonable and attainable volume commitments. Never include agencies that are having severe financial problems.
- Create a business plan that addresses sales and marketing planning, financial management, personnel and growth, automation, and perpetuation.
- Establish committees to contact companies to discuss the venture and negotiate contracts.
- What does each participant hope to gain from this association?
- Which types of business (Personal, Commercial, Life & Group, Surplus Lines, etc.) will the cluster market and which will the individual agencies retain?
- Which companies does each agency represent, and are they willing and able to share those markets with the rest of the members?
- Where will the cluster office be located?
- What volumes will each of the participating agencies commit to the cluster?
Although these items form the core of a cluster formulation, they don’t exhaust the list of work to be done. It’s wise for participating agencies to set reasonable deadlines for performing every task.
While creating an action plan is helpful, bear in mind that carrying it out takes time. Each agency owner must continue to sell and manage their individual agencies until (and after) the cluster is completed. As Roger Sit-ins says, “An ant can eat an elephant -- if it does it one bite at a time.”
You can avoid a lot of trouble and unrewarded efforts by contacting clusters and asking them about problems and the things to avoid. Since there’s a lot of clustering going on today, many cluster managers have been bombarded by these requests, so be prepared for some rejection.