Protecting Your Agency's Most Valuable Asset

by Diane Herbert and Pamela Millard

As an insurance agency, your focus is on developing new business and retaining customers. You need to do both in order to grow, and growth is key to profitability. However, if you spend all your time and energy on sales and service, you might be overlooking one of the crucial success factors for growth and profitability-satisfied employees.

When asked what their biggest challenges are today, agency owners invariably place 'finding and keeping quality staff' high on the list. It's true for large and small, urban and rural agencies alike. So perhaps a good portion of your time and energy should focus on developing new employees and retaining the employees you have.

'All that separates you from your competition are the skills, knowledge, commitment, and abilities of the people who work for you. Companies that manage people right will outperform companies that don't by 30% to 40%,' writes Jeffrey Pfeffer in The Human Equation: Building Profits by Putting People First.

With a tight labor market and the need to keep a sharp eye on the bottom line, finding quality employees isn't getting any easier. You've always had to compete with banks and other service industries; now there are also technology companies-all those dot-coms-competing for the best from the labor pool.

The workplace has changed and continues to change. With a keen focus on profitability, employers want more for their employment dollar. And those workers willing to give more also expect more in return. Loyalty between employer and employee seems to be going the way of the dinosaur.

One thing that isn't changing is that the insurance industry continues to have a poor image as a place to work. As a group, insurance agencies hire fewer college graduates, pay lower wages, and invest less in training and developing staff.

If you're not thinking differently about the relationship between your employees and your bottom line, it's time to start. Do your view your employees as your biggest asset or your biggest expense?

Your employees-producers, customer service representatives, marketing staff, assistants and clerks, accounting staff, and receptionists-all contribute to the bottom line in very tangible ways. They help you find new customers and keep the ones you have. Knowledgeable, personable, satisfied employees are a very real asset. When you fail to nurture and protect this asset, the cost is high, perhaps higher than you realize.

If employees aren't given the right tools to do their jobs effectively, for example, or if they're treated unfairly or are overworked and stressed out, they can become frustrated and unhappy. This has a negative impact on their productivity. Disgruntled employees can be disruptive to the entire organization, sharing their discontent with whoever will listen. This attitude rubs off on others, bringing the morale of the entire organization down.

Low morale also takes its toll as your staff attempts to provide customer service. You can hear it in their voices; it shows in their attitude. Certainly they're not focused on looking for ways to delight your customers. Nor are they motivated to cross-sell accounts or upgrade coverages.

There's a compounding effect. Studies have shown that increasing client retention by just 5% can boost an agency's profitability by 50% to 100% or more. But dissatisfied employees can cause retention to significantly fall. Lower retention equates to lower profits.

When morale drops, turnover rises, causing costs to go up dramatically as well.

The cost of turnover can be astronomical. In the average-size agency ($1 million to $2 million annual revenue), a negligible staff turnover rate of 5% -- just one employee-could cost as much as $86,000 to $115,000. And this comes right off your bottom line. Study upon study shows that replacing an employee can easily cost two times the individual's annual salary and benefits. Let's look at how the costs add up:

First, there are the clear-cut, direct costs that are readily identified and quantified:

• Recruiting costs, such as advertising
• Recruitment firm fees (if applicable) -- estimate 25% to 30% of the position's salary
• Internal staff's time to search for and interview potential candidates
• For a management position, possible relocation expense, hiring bonus, or referral bonus
• A temporary replacement (part-time salary or temp agency fees)
• Specific internal or external training programs plus licensing or certification fees (You not only lose the investment in the former employee, you'll possibly need to pay for training or certification for the new employee.)

Then there are the indirect or less tangible costs, which can be quantified if you take the time to think it through:

• The cost for a staff person to fill in while the position is vacant. The lost productivity will amount to at least 50% of the departing individual's weekly compensation and benefits. If the position stays vacant for any length of time, increase the cost for lost productivity to 100% of the job's compensation.
• The productivity lost while the departing employee prepares to leave. Departing employees aren't fully productive the last few weeks they're on board (before and after they submit their resignation). Add this expense to the overall cost of turnover-a loss of productivity of 50% or more.
• Co-workers' lost productivity caused by the buzz about the departing person's reasons, discussions about who will perform their work, planning going-away parties, and so on. Even if the time spent is only a few hours per person, expect departmental productivity to decline by 10% to 20% for a few weeks.
• Time required for the manager to assess what work remains and to determine how to cover the work until a replacement is found.
• The cost of lost knowledge, skills, and contacts that the departing employee takes from the agency (estimated at 50% of the person's annual salary, increased by 10% for each year of service).
• The potential for lost business. Producers or CSRs may take business with them or come back for it later. Worst-case scenario: Client retention can take a major hit if service levels deteriorate significantly, which is a real possibility, particularly if turnover is high.

Even after the position is filled, the turnover is still costing you money. Research shows that, on average, it takes 13.5 months for a new employee to reach maximum efficiency in performance. The position's effectiveness will be 25% or less during the first few weeks and gradually reach 50%, then 75%, up to 95% or so by the end of the first year. Expect an average productivity of about 70% the first year-that's another 30% added to the cost of turnover.

Watch out, too, for the double or triple whammy! All too frequently we don't lose just one employee. Turnover seems to occur in bunches. If it becomes known that there's been some turnover at an agency, others may begin to specifically target that agency. And many times, the departed employee will recruit former co-workers.

Keep in mind, however, that not all turnover is bad. If you never hire new people to bring in fresh ideas and techniques, you can run the risk of becoming stagnant. And there are times when even with all the costs, your organization is better off without a particular individual-the poor performer or the one who may be creating turmoil and generating ill will in the rest of the organization. These folks often negatively impact the whole group, lessening overall productivity.

Assuming that you're convinced that you need to invest as much-or more-in finding and keeping good people as you spend in finding and keeping good customers, what should you be doing? Here are some techniques of the most profitable insurance agencies:

• Recruit constantly. Whether or not they have a specific job vacancy, top agencies are always on the lookout for qualified-and quality-people. When an opening does occur, they know whom to call. Some agencies even bring quality people into their organizations before they have vacancies.
• Build bench strength. Good agencies create the kind of organization that encourages people to prepare for their next job. When a vacancy occurs, there may be someone already on staff who you' like to hire, which is a faster, more productive (much shorter learning curve), and less expensive (no recruiting costs) way to fill the position.
• Train and develop staff. Successful agencies have formal training programs for new employees and provide staff with ongoing training to improve skills and build professionalism. They encourage mentoring (which is different from training) because they know it's key to the successful development of new employees. The best agencies provide their employees with intellectual challenge and the opportunity to grow.
• Create a great work environment. The best agencies involve their people in the strategic vision of the business, and they have goals that energize the organization by connecting with the personal values of the people who work there. They encourage their employees to have fun and to take pride in the contribution they make to the business and to the community. They support their employees' need to balance their personal and business lives.
• Provide the tools employees need to do their jobs effectively. They use technology to drive processes, and they make sure their workflow really works. They want the best people doing the right things right.

The best agencies don't always pay the highest salaries, but they pay their people fairly and competitively. And they provide benefit packages that include the necessary features plus ones that are nice to have.

In short, the most profitable agencies understand the relationship between satisfied employees and satisfied customers, which ultimately determines their bottom line.