Here's a letter I received recently:
Dear Dave:
I am the manager of a four-person Life/Benefits department of a P/C agency. The agency is set up with profit centers such as Personal Lines, Commercial Lines, Surety, and Life/Benefits. Each profit center shares in the common overhead of the agency office supplies, salaries, etc.
I have no problem having my department pay for what it uses. My problem comes from being charged roughly one-fourth of the common overhead for the total agency, for such items as agency administration, accounting, legal services, taxes, repair and maintenance, etc. Those agency costs are high and take a big chunk out of our department's income. Agency owners are firm in saying that each profit center must bear its part of the total operation, and I can't find the flaw in their argument (if there is one). Please tell me they're right and I'm wrong, if that's the way it really is, or else tell me how to show them they're wrong. We really need to know.
Ohio Reader
Dear Ohio Reader:
In my view they're wrong, but it's easy to see their attitude as an honest mistake. If the Life operation's commissions are shared with the P/C agency's principals as owners or co-owners of the Life operation, then in effect you are paying for Life leads. You're also covering your department's overhead by your production. The rest of the income should go to the Life producers.
The problems arise in considering the Life operation a profit center equal in structure to the P/C departments. It shouldn't be. The Life operation is a separate, non-P/C operation which exists alongside the P/C agency (not in the literal, physical sense, but in fiscal terms applying to the structure and concept).
The Life operation gets its leads and builds its client relationships from the total product of the P/C agency (irrespective of how the P/C agency labels its divisions or allocates its overhead). In other words, the Life function starts with the fact that the P/C agency already exists rather than the idea of building a P/C agency. The Life producers usually have no share in the P/C profits, no equity in the P/C agency, and perhaps only secondary interest in the inner workings of the agency.
More important, Life producers 'pay' for Life leads by splitting commissions with the P/C house. If it's a fair split, the payment satisfies their obligation to the P/C house for leads. If, in addition, Life producers were also expected to help pay for the cost of producing those leads (i.e., the cost of running the P/C agency), then they would be paying twice for the same leads: once by sharing commissions and again by partly covering P/C overhead.
Consider the Life operation as a separate corporation, even if it isn't so in your case. Would the P/C house feel justified in charging an outside corporation for its overhead? Probably not.
When a P/C house puts part of its overhead onto the Life operation even when the figures are adjusted to be fair the Life producers might resent the inefficiencies that they see (or think they see) in any part of the P/C operation. 'If I'm paying part of the overhead, I don't want to see anybody goofing off,' is the feeling that may result. A good relationship can turn sour for no good reason.
Another possible negative effect is that Life producers may be subsidizing the P/C operation indirectly. For example, if a large P/C agency has a relatively small Life producer staff and the allocated expense system described above, the Life people are paying for Life leads they will never use because the agency can produce more Life leads than they can handle. In extreme cases, P/C agencies with $40 million to $50 million in volume may have only one or two Life producers. Under the allocated expense or profit center accounting method, the Life people are burdened with a share of large overhead, which they must satisfy along with the Life operation's overhead before they start to earn some take-home dollars.
It's unfair and illogical, and ultimately will hurt the P/C agency because Life producers will bristle and perhaps leave if the situation isn't remedied. In my experience with agencies, all parties suffer when expense allocations are distorted against Life operations.