The cost of professional services continues to escalate, with partners in top CPA firms billing hourly rates of $400 or more, and partners in top law firms billing at rates even higher. Could a CPA or a lawyer really be worth that kind of money? How about an insurance agent? Kevin Stipe helps you to determine your effective hourly rate and its potential influence on your daily activities.
If you're an insurance broker and those rates make you feel underpaid and underappreciated, consider this: Top producers in many “Best Practices” agencies bill at higher equivalent hourly billing rates than even the most talented legal and financial professionals in their communities!
If you don't believe me, do the math.
Since insurance agents and brokers are usually paid on a commission basis, with their services “bundled” rather than broken out and billed by the hour, they have no “billing rate” to compare to other professions. However, we can estimate a comparable rate by analyzing the effective hourly billing rate for the average producer in the top 25% performing agencies for the three largest revenue categories in the “2002 Best Practices Study.”
Using the $2.5 million to $5 million revenue category as an example, here's how we arrived at our numbers:
We begin with the average commercial Property/Casualty producer's book, which is $677,068 in annual commissions. To compare a producer's book of business with the effective annual billings of a lawyer or CPA, we must deduct the cost of services that an agency usually includes at no additional cost that would be separately charged for in a bill-by-the-hour professional environment.
If our commercial P/C producer's clients were billed for professional services in a similar fashion to law and accounting firms, we estimate that the producer's clients would be charged separately for the following services (as a note, the hourly billing rates shown are our estimates based on a review of market-based billing rates for comparable services):
- High-level technical support. We've assumed that based on the size of the book shown, 75% of an account executive's time (1,500 hours annually) would be billed out at $125 per hour.
- Marketing/placement. We've assumed 100 hours annually at $100 per hour.
- Claims. We've assumed 50 hours annually at $75 per hour.
If the costs of these services are added together, the total comes to $201,250 in annual hourly charges. These must then be deducted from the producer's annual commissions to get the “Net Commissions Allocated to Producer,” which represents effective annual billings.
Dividing this by the 1,096 hours a year that the producer spends servicing clients provides us with the “Effective Hourly Billing Rate” (EHBR) of $434.
For producers in the larger “Best Practices” categories, the rates were even higher, with the rate in the “Over $10 million” category being the highest, at $615 per hour. This would be competitive with the hourly billing rate of a partner in a Wall Street law firm!
As a rule of thumb, a producer can determine their hourly billing rate by dividing total annual commissions by $1,000 and multiplying the result by 60%. (For example, a producer with a $1 million book has an effective hourly billing rate of roughly $600.)
So what's the point?
Aside from the curiosity questions that immediately arise, such as am I really worth that much? (and, by the way, the answer is yes!), some interesting applications follow.
Most important, do you habitually undervalue your time? What if you started out each morning with a conscious recognition that each hour of your day is worth several hundred dollars? Would you be more inclined to allocate your precious time to high-return activities?
In his book Good to Great, Jim Collins notes that a common characteristic of great companies is that their people regularly develop “stop-doing” lists, in addition to their “to-do” lists. In light of your lofty billing rate, which of the following should be on your “stop-doing” list?
- Filling out your own applications (can you imagine a law firm that requires the partners to do their own word processing?)
- Practice-quoting for price-driven prospects who use you simply to keep their current agent honest
- Handling Personal Lines and small Commercial accounts with no real growth prospects
- Targeting prospects with revenue potential of less than that of your average account
- Any activity that could be done effectively by somebody else in your agency at a substantially lower hourly rate.
This billing rate concept exposes a quirky paradox. We've frequently heard — particularly from those in direct support roles — that many producers have a misguided sense of their own self-worth, and tend to overestimate their own value.
We agree that they're misguided; but the irony is that we think their mistake is not that they value themselves too highly, but rather not highly enough.