HIGHER EXPECTATIONS EQUAL GREATER PROFIT MARGINS
by Carol Hammes
Greater profit margins and elevated agency values are the direct result of higher levels of productivity attained by sales, service, and support personnel. There is a tremendous difference between simply keeping the employees busy and keeping them busy making a profit. Creative people who are encouraged to use innovative techniques will solve problems faster. In decreasing the amount of time, they will be increasing hit ratios and retention rates while lowering operating expenses. By reducing errors and duplication of effort, an enthusiastic and efficient group of employees will respond better to the needs of present and future customers.
We are convinced that the single most effective way to improve productivity levels, increase your agency's value and enhance your own quality of life is to cultivate superior people. Make the management commitment to accept only the cream of the crop. Spend the necessary time and money to locate and hire the best people rather than continually spinning your wheels trying to make underachievers better performers. Once hired, provide them with specific job training and educate them on all aspects of the insurance agency business. Effectively communicate the organization's purpose and provide enough flexibility so that they will be able to use their skills and motivation to help you achieve those goals. Structure the performance feedback and compensation program to reward the good performers and weed out the weak links. What's in it for me if I do? And what happens to me if I don't? Mediocrity is contagious; if tolerated it will eventually drag even the best people down.
Once the organization is staffed with the right kind of self starters, the owners and managers can become coaches rather than guardians. The job of a coach is to define the dream, to help each of the players understand his or her role in helping the team accomplish the objectives, and to motivate the group by keeping the sense of urgency alive. If change outside the agency is faster than change inside, you all have a problem. What worked well last year may fail this year. Coaches encourage innovation and applaud the risk takers while delicately using team pressure to keep the prima donnas from going too far off track and the detractors from deflating the group spirit.
Part of the job of creating the vision and maintaining the team culture is to set reasonable expectations. If you have the right team, what you expect is what you will get. The goals must be ambitious enough to encourage people to stretch without being so aggressive that they are doomed to failure. It has been our observation that many agency owners have not been setting expectations high enough and, as a result, they have ended up achieving much lower levels of productivity and performance than their high performing competitors have. A recent issue of Business Insurance lists the 20 agencies with at least $150,000 in revenues per employee. While many of these firms are large brokers or specialty operations that characteristically have higher productivity levels, some are small- to medium-sized general lines property-casualty insurance agencies. While there are often variations in productivity averages based on agency size, location or orientation using those criteria solely to explain below average performance is merely an excuse, not a reason.
One of the first steps in determining appropriate goals and objectives for the agency as a whole and for the producers and service personnel individually is to compare actual results to those of comparably sized agencies. Using our consulting data base and the results of the recent Market & Financial Survey we have prepared a number of different types of averages for you to use in your planning activities for the coming year. In the balance of this article, we have presented the average ratios and measurements for four different agency sizes based on total revenues, not premiums. If your agency is at or near the top of one of the ranges, use the next larger composite group for comparative purposes.
Keep in mind that all of these ratios and measurements are the averages of the results from agencies with all different levels of performance. Above average agency will generally record measurements that are about 20% better than these averages. Assuming that it is your desire to have a high performing agency, we suggest that for goal setting purposes you multiply the average measurements by 1.2 to establish your objectives.
The most commonly used measure of productivity for most types of service businesses is to determine how much income is generated per person working in the firm. Twenty years ago the average independent insurance agency had revenues per employee of around $32,000. Today the average agency generates more than $80,000 in revenues per employee. This is an annualized growth of 6% per year with much of the increase coming during the '80s. Soft-market conditions during the nineties have kept the annual increases at a more modest 2% to 3%. The following table presents the average revenue per employee figures for 1995-96 by size of agency. To obtain a valid comparison you must use total agency revenues including contingents and interest and all employees including producers and owners for the computation.
| Agency Revenues: | Less than $600,000 | $600,000 - 1,500,000 | $1,500,000-3,000,000 | Over $3,000,000 |
| Revenue/Employee | $67,691 | $80,680 | $85,463 | $96,094 |
| Compensa/Employee | $35,051 | $44,143 | $45,814 | $53,666 |
| Difference | $32,640 | $36,537 | $39,649 | $42,428 |
| Profit/Employee | $4,264 | $4,518 | $4,273 | $7,207 |
Compensation per employee includes salary, bonuses, commissions, payroll taxes, group insurance, profit sharing contributions, and other employee benefits. The difference between the revenues per employee and the compensation per employee represents the amount available after funding personnel to cover other operating expenses and profit. Note that while the revenues per employee is $30,000 higher in larger agencies than in the smaller ones, the difference per employee is only $10,000 higher. Larger agencies may be more productive, but it takes more expensive people to get that accomplished. The profit per employee figure divides the total number of people working in the agency by the pretax profit. Because most insurance agencies are operated as privately held corporations that often minimize reported profit, this figure is probably of less comparative value.
One of the benefits of being larger is that it affords agency employees the opportunity to specialize. Employees in smaller agencies must wear a number of hats but as the firm grows they can select sales, service support, or management as their primary job function. The next table shows the percentage of total personnel performing the sales, service and support functions in the four agency size groups. Clearly, the larger agencies have proportionately more people involved in management, data processing and clerical backup than do the smaller firms, where often the same person must be both a CSR and a receptionist.
| Agency Revenues: | Less than $600,000 | $600,000 - 1,500,000 | $1,500,000-3,000,000 | Over $3,000,000 |
| % in Production | 34% | 32% | 30% | 25% |
| % in Customer Service | 54% | 52% | 51% | 51% |
| % in Admin/Mgmt | 12% | 16% | 19% | 24% |
A cardinal rule in setting up an organizational structure and in allocating job functions is to have each transaction handled by the least expensive and yet capable position. When the more experienced CSRs can spend their time servicing accounts rather than making copies or answering the phones, they are in a better position to relieve the producers of routine account and company contact. This in turn allows the salespeople more time to spend on selling new business and maintaining public relations contacts with existing accounts. Overall agency productivity is enhanced, profits are greater and the level of job satisfaction is higher.
The following chart shows that as the number of administrative personnel are increased (resulting in lower revenues per administrative person), the revenues per service person and per salesperson also rise. The "aggregate" in revenues per employee and the profitability of the entire operation increase accordingly.
| Agency Revenues: | Less than $600,000 | $600,000 - 1,500,000 | $1,500,000-3,000,000 | Over $3,000,000 |
| Revenue/Producer | $199,511 | $249,724 | $282,131 | $386,167 |
| Revenue/Service | $126,357 | $154,241 | $166,077 | $187,833 |
| Revenue/Administra. | $541,529 | $499,448 | $468,337 | $401,115 |
| Aggregate RPE | $867,397 | $903,413 | $916,545 | $975,115 |
1996 AVERAGE AGENCY PRODUCTIVITY MEASUREMENTS
| Agency Revenues: | Less than $600,000 | $600,000 - 1,500,000 | $1,500,000-3,000,000 | Over $3,000,000 |
| Commercial Lines: | | | | |
| Commissions/account | $433 | $565 | $970 | $2,233 |
| Commissions/service person | $131,241 |
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