OVERCOMING OBSTACLES TO AGENCY GROWTH
by Carol Hammes
Deal with agency growth problems before they reach a crisis point.
Unfortunately, this agency scenario is all too common. Enough new business is produced to keep the organization on a steady growth curve, and morale is good. Then, almost overnight, the bottom drops out. The system that was running so smoothly falls apart and the well-oiled team grinds to a cranky halt. Another agency has fallen victim to its own success.
There are several common growth plateaus beyond which it’s difficult for an insurance agency to expand. When an organization has outgrown one structure and is having difficulty evolving gradually into the next one, stagnation can easily set in. As the growth curve flattens out, it takes more (and perhaps a different kind of) management attention than had been necessary during the preceding couple of years to “jump-start” the agency and get it moving forward again. The fact that so many mergers and sales take place when one of these plateaus has been reached shows how hard it is for many agency owners to shift gears.
The first step in solving the organizational problem is to identify it. One of the most common indications that your agency might be at one of these plateaus is a reduced level of productivity in the internal staff. The confusion and apathy of these employees spills over into the sales force, and the whole agency seems to be working at cross purposes. Employees and producers seem to be working harder, but with diminished results and much less enthusiasm.
Once identified, you must address the underlying cause of this drop in productivity and morale. Generally the situation results from the agency’s failure to adapt to the changing requirements of a growing business. In some cases, basic organizational relationships have not been clearly defined or communicated. In others, job functions have not been allocated properly for an organization of this size.
From the time a third person is added to the payroll, a constant re-evaluation needs to be made of who should be doing what — and how. Since most agency owners wear a number of hats, few are able to anticipate the need for change before the organizational symptoms become serious. Once sales and service levels fall off, it takes strong commitment and an all-out effort to get things back on track.
THE SALES PLATEAU
The first critical plateau is when the book of business reaches the size at which one owner/producer is saturated and can’t handle the sales or servicing of more accounts. For more growth, another sales person has to be brought into the agency. Since the money to fund this new producer must come directly from the compensation or profit of the owner, the decision to proceed can be painful.
The choice becomes one of expanding the agency or retaining the owner’s current standard of living. Most owners willingly choose the expansion route at first, hiring a young person with great hopes for success. After several false starts and a significant amount of expended resources (time and money), many agency owners become discouraged and begin to question whether they really want to grow badly enough to bear the cost.
It used to be that an agency could stay at this plateau indefinitely, with the owner taking out 60% or more of the gross commissions in personal compensation and perks. But most insurance companies are no longer content to carry agents that aren’t growing with them; and most require higher premium commitments than they once did. If you want to have enough companies to be able to compete, you have to continue to grow. One solution is to merge with another agency in the same boat. If this alternative is not feasible or attractive, developing a successful producer might be the only way to break through this plateau.
Before hiring another producer, you need to develop a game plan that recognizes the realities of the situation. Many young people have a difficult time in this small agency environment because there’s rarely much sales management direction from the owner and usually no contemporaries with whom to share experiences. It’s hard for a green salesperson with no existing business, and thus few referrals, to operate in a firm where the only role model is an owner who has had a number of years to build up a book of business. It’s equally difficult for the owner to remember what it was like starting from scratch. The owner might have little empathy or sympathy for the newcomer. The resulting communication problems and frustration on both sides often lead to failure. The next time you plan to add a salesperson, consider these items:
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If you agency is located in a small city or town, forget about hiring a company underwriter or field rep from several hundred miles away and instead find a self-starter who wants to stay in your community.
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Pay a draw against future commissions produced; do not guarantee a salary that is unrelated to production/performance.
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Consider offering the person a deferred compensation arrangement to vest in accounts produced, in return for a lower commission percentage.
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Set ambitious, but reasonable, expectations for the number of X-dates, appointments, and sales that will be expected every week for the first year of employment.
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Give the person some of your accounts to handle to provide a basis for referrals and an opportunity for some meaningful initial work activity.
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Be patient — but be ready to act quickly to cut the cord if the effort and results are not apparent within the first six months.
If you don’t have the energy or the opportunity to start over with another producer at this time, consider this alternative for growth: Upgrade the support staff and free yourself up to handle more outside sales activities. Analyze your own involvement with existing accounts. Are there a number of things that you do that don’t necessarily need to be done by a producer?
By training staff or hiring a more technically oriented person, you’ll be able to assign most of the servicing of the smaller Commercial accounts and much of the marketing and processing activities on larger clients to someone besides yourself. With technically stronger back-up and your own proven sales ability and stature in the community, you could possibly double in size without adding another producer. And once the agency is larger, the economic trauma of adding salespeople will not be as significant as it is at the smaller size. At this point you might be willing to try again with another new producer.
The key to growth at this stage, either through adding a new producer or upgrading of the support staff, lies in the owner’s willingness and ability to delegate sales and servicing functions to others. To do this, the owner must be comfortable with the ability of the employees to handle the insureds appropriately. If this isn’t the case, to break through this plateau you’ll need to clean house and hire people who will provide this level of comfort. Some tough personnel decisions might have to be made.
THE MANAGEMENT PLATEAU
With determination, hard work, a change in attitude, and a little bit of luck, an agency will leave the initial sales plateau and grow steadily until there are around ten people. At this stage in its development, more individual and departmental specialization is necessary, and more time must be spent on personnel management. Because the owners are the best producers in an agency of this size, they might understandably be reluctant to spend the time on managing employees and other salespeople properly. However, it’s critical that someone pay more attention to directing, controlling, and motivating the staff.
The obvious solution is to hire a person to manage the staff while the owners spend their time selling. But the agency isn’t really large enough to afford the luxury of a full-time manager. As an interim measure, agency owners often appoint working supervisors in several departments to help with day-to-day management duties. This move works in some cases, but in others the “appointment” itself becomes the designated solution and the necessary authority is not delegated to go along with the new responsibilities. If adding a new supervisory level in the agency hasn’t relieved the owners of basic management duties, you’re doing something wrong and will need to start over.
The most frequent mistake that agents make in appointing supervisors is that they pick the “best” CSRs and/or the employees who have been with the agency the longest. People with technical skills often lack the “people” skills or patience to effectively manage employees who have different levels of training and motivation. And those individuals who have been around since the agency was started tend to live in the past and might not be receptive to new procedures, automation, or the needs of the younger employees.
Having the right people in the supervisor positions is the key. If you’ve chosen the wrong people, or if haven’t given the supervisors the necessary authority, move quickly to change things. The normal tendency is to let it go too long, hoping that the situation will get better. Meanwhile, turnover reaches epidemic proportions and the agency can’t grow because the best salespeople are spending a lot of their time dealing with personnel and procedural issues.
THE ORGANIZATION PLATEAU
Once the necessary supervision is in place, an agency can almost double in size before things start to fall apart again. When the head count has grown to somewhere between 15 and 25, all of the people and systems that were working so well together suddenly break down again and life becomes downright unpleasant. This is the hardest plateau to break through — and the one at which many agencies end up selling out. Fewer than 10% of the nation’s independent agencies have made it past this point.
At this level, you need to change the fundamental management and operating philosophy of the firm. It can no longer exist as “one big happy family” or a group of “agencies within the agency” and must instead become a cohesive business organization with a clear chain of command. There must be written rules, policies, procedures, and regulations that are enforced by all of the owners and followed by everyone. Exceptions to the rules can be tolerated only if they have a legitimate business purpose that’s clearly understood by the entire management and ownership group.
For most agencies that have reached this point, having an office manager ceases to be a luxury and becomes a necessity. Because it seems to be cost effective to assign the duties to an owner, many agencies go this route at first and end up prolonging the time spent at this plateau. Assuming that one of the owners is willing to give up most of their sales activities to devote the time to managing, an appropriate compensation package must be arranged that overcomes the financial temptation to continue spending time on sales. The decisions regarding this compensation issue often cause (or bring to the surface) serious disagreements between owners.
It’s often a better use of available resources to hire or promote someone other than an owner to handle these management functions. With employee benefits, an office manager will cost an agency somewhere around $75,000, perhaps less in rural areas. Can the owner/producer who is giving up some production to perform this function produce and service more than this in new commissions by concentrating exclusively on sales? And will the owner who has had a long history in sales with the agency be able to shift orientation and focus on management issues without prejudice?
It’s generally easier to hire a proven manager than to hire a successful producer to replace the sales activity of the owner who might or might not turn out to be a good manager of people. While this might seem to be the most convenient solution, appointing an owner to be the office manager rarely works out well.
The key to finding a good manager is to hire someone who is strong enough to weather the inevitable second-guessing of the owners and yet remains sensitive to the uniqueness of this particular organization. The most important quality for this person to have is a proven ability to manage people. You might be lucky enough to find someone experienced in the P/C industry and perhaps even in an agency environment who can also handle personnel management issues. But if you cant have everything, choose someone who has the people skills and who is smart enough to learn what’s necessary about insurance to help guide the agency employees on general issues and to defer to those with more technical knowledge when the situation warrants.
In addition to tightening up the organizational structure and personnel management, an agency at this plateau must also set up and communicate long-term goals for sales, marketing, company relations, staffing, automation, and perpetuation. It’s no longer sufficient to work hard: Every person in the agency also has to work smart and in concert with one another. There are often several owners in an agency of this size and their own personal styles, objectives, and motivation levels might not be compatible with the overall agency goals. These differences must be identified and dealt with, no matter how difficult the resolution might be. Ignored for too long, these differences between owners can literally blow the agency apart.
THE MARKET PLATEAU
Several thousand independent agencies have managed to break through the organizational plateau and are growing steadily. The next major challenge that the owners of these successful agencies will face is the real or perceived saturation of the traditional marketing territory. Very simply, the agency has written almost all of the business that it wants to write and there seems to be few new prospects on the horizon. In small towns, this market crisis might happen before the organizational crisis, but in towns with populations in excess of 40,000, the market plateau usually follows the organizational plateau.
The first thing to do when you notice a slowdown in sales and an increase in excuses from producers is to develop some statistics on the actual or potential geographic market to determine whether there are in fact any new accounts to be written. It might be that a more direct approach to sales will be necessary, with sales centers, target marketing, and cold calling replacing referral selling techniques. If you haven’t launched a concerted sales effort in the past, the “saturation argument” might only be an excuse.
It could also be, however, that there are few new accounts to be written. Then the agency owners have to make some tough decisions about whether to:
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Expand into a new marketing area through acquisition or sales offices
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Concentrate more on lines such as Life/Health that have not been a major part of the agency in the past
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Go into niche marketing with statewide programs, either as an end in themselves or as springboards to expansion into other marketing areas with general lines of insurance.
You’ll need to make a number of major decisions if the agency is to break through this plateau — and all of them will involve a psychological shift in the way the agency has traditionally done business. If all of the owners can’t agree on this direction, a change in ownership might be necessary for the agency to continue its growth track.
CONCLUSION
You can minimize the problems associated with reaching and breaking through any of these plateaus by anticipating them and making the necessary changes before your organization starts to fall apart. If you do a good job, the agency might not even notice the plateau. If the crisis is left to happen by itself, the stagnation will generally persist for four or five years until the agency goes under. The choice is yours.
The late Carol Hammes, principal of The Middleton Group, was one of the Independent Agency System’s most widely respected management consultants. She will be sorely missed. Reprinted with permission from THE MIDDLETON LETTER, Volume X, Number 3.