If there are two phrases that turn agency principals off, they are probably 'work process engineering' and 'business planning.' The former connotes laying people off, inherent criticism of previous business decisions, and expensive computer equipment. The latter sounds like Mom's advice to eat your veggies -- it's dull and will take forever because it's no fun. You're never sure it'll have any positive effect. (Some of us ate tons of carrots and we're still wearing strong lenses. Would we really have been blind without those carrots? Who knows?)
But avoiding the above-mentioned terms is a little difficult in a consultant's line of work. The circumlocutions that some of us come up with to avoid those two terms are creative-but are quickly seen through by smart agency principals. (After attempts at diplomacy, we often hear, 'You're saying I should have a business plan, right?)
Knowing that principals and other agency managers are busy people who possess a wealth of experience, we have been suggesting a new way of approaching the desired goals of work process redesign and business planning.
This new methodology starts with an equation the represents the reality of running your agency-and really any business:
INCOME - EXPENSES + OUTSIDE INFLUENCES = PROFITS
We have slipped something new into the classic Accounting 101 business formula. 'Outside influences' need to be considered in any analysis of potential profits. Think about it. You can reach all your production goals- exceed them even-and if one of your carriers unceremoniously cuts commissions, will your profits be the same as you were expecting?
OK, so who cares about this revised business formula? Well, let's expand on it because it's not just an equation-it's also the representation of a 'spread sheet' thought process. In our equation, everything that changes on the left side of the equal sign will not have a direct effect on the right. It will first affect the other items on the left. The cumulative effect of those 'left side' factors will influence the profit on the right side of the equation. This is what many of the 'downsizers' of the last few years often miss entirely. When cutting staff, they seldom stopped to evaluate the effect on current and future revenue. They often failed to predict the positive effect for the competition (one of those 'outside influences) if a laid-off center of influence went across the street. What was good for the competition often took revenue directly away from the downsized organization. Expenses were reduced by the downsizing, but revenues were reduced even more, resulting in a worse bottom line than before.
One agency principal has the spreadsheet business equation up on the wall. Every decision he considers or every event of import gets referred to the wall. He studies what effects are likely to occur from the current situation and chooses the best potential outcome (or at least the one with the least negative result).
Let's 'drill down' a little on each item in the equation to get a better feel for its practical applications. We'll start by defining the elements to consider as income.
INCOME - expenses + outside influences + profit
Current commission from policies in force
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Current income from risk consulting, profit-sharing and other related income
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Potential business from current clients. Does including potential income strike you as strange? Remember, this is a spreadsheet analysis. The purpose of the game is to maximize potential profit so you must include potential income.
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Potential from known but 'untapped' prospects
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Income from new ventures (e.g. fees to service a broker's business)
In similar fashion, expenses and outside influences need to be defined.
Let's look at expenses first.
Expenses include:
Carriers. You probably haven't thought of them as an expense, but we bet you'll agree that some carriers take more 'care and feeding' than others. Do they drain more from you than more cooperative, empathetic carriers?
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Technology. Its cost had better be outweighed by its monetary benefit.
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Current staff salaries. Includes payroll taxes, benefits, etc. Don't forget effects of upcoming retirements of owners and staff.
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New talent. Technology skills, sales skills, client industry expertise might not exist in your office today. Should it?
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Outside skills. Not all expertise has to be full-time. For instance, why have a full-time Novell Certified Engineer when two hours a week and a three-hour emergency every quarter is your real need?
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Motivation (monetary and interpersonal). This includes monetary outlays as well as the time and personal attention that managers devote to staff motivation.
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Physical plant. 'What's the rent?' is just the beginning. Should you own or rent-and does that decision affect how you are perceived in the community? Will your street location affect the volume and quality of traffic into your office? How does your office 'feel'? When a client walks in, what does she know or assume about you personally or about your operation?
Let's define outside influences:
Government. Obviously, taxes and near-future tax changes; ADA, Family Medical Leave Act; even building codes can't be ignored.
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Carriers. Where will commissions go? Will they be writing in the state next year? Will a new carrier open up markets for you? Are rate changes expected? Will they offer/support helpful technology?
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Vendors. Are enhancements worth the price? What if a vendor goes out of business? Will a change of vendors pay off?
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Competition. Are you vulnerable? What's the worst they could do to you? Should you buy them? What about clustering?
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Family members. Ever think of their effect on your business? Is coaching Little League a business advantage? Will necessary family demands divert your attention from the business? How about other staff's family demands?
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Local (& wider?) economic condition. Can you find a silver-lining in a poor economy? Can you ready your agency for expected growth? Can you positively affect the local economy with your civic activity or role in local government?
Most managers and principals add to each definition list. You may want to do that, too. The intended use of the fully displayed equation is a convenient way to 'cover all the bases' when you make decisions or encounter things you can't control (e.g. a carrier's commission cuts) but to which you should respond. Take the time to evaluate whether any new situation or considered management action will affect any of the items we have listed or the ones you may have added. Use your judgment to estimate the dollar effect of any change. Then sum up the left side of the equation and see what it does to your expected profit.
The real fun begins by playing with the formula. What happens if we combine the volumes of three small carriers to get the benefit of a larger volume on profit-sharing? What happens if we spend some bucks on new automation? Will it allow us to actualize that potential income? Will it have a long-term effect on staff salary level? (Some principals have been convinced that they couldn't afford not to automate.) A special favorite of ours is using the formula to evaluate a carrier's request to do interactive interface for them. Will it require extra input staff? Will CSRs have less time to round accounts and thereby decrease potential revenue? That analysis has led some agencies to say no to interactive interface and encourage their carriers to work more diligently on single-entry.
Managing an agency has the potential to be not only lucrative but fun. Using the Spread Sheet Business Equation may hit both those runs in.