This second installment in a three-part article (Part One HERE) focuses on the major techniques for controlling your agency expenses to boost profit margins.
The formula for curbing agency expenses isn’t rocket science: Control the number of employees!
After all, it’s far easier to control expenses than income. Although a number of outside factors (market conditions, competition, regulation, etc.) can affect sales, none of these factors impacts expenses. As the manager or owner, you make every decision.
EXPENSE CONTROL 101
Once you know the cause (employees, customers, etc.) of each expense, put it into one of three categories:
- Absolutely necessary
- Not absolutely necessary, but useful
- Neither absolutely necessary, nor useful
First, eliminate every potential expense in the third category and then take a careful look at those in the second. However, because unnecessary employees fall into the third category, you might not even have to get to the second.
IS YOUR AGENCY OVERSTAFFED?
You probably don’t think so. How could you have unnecessary employees? They all seem so busy! Before you answer this question, consider the results from a workload accountability survey of five agencies over a 13-week period.
To determine the number of transactions processed, we used these criteria:
• Incoming mail (including downloads, e-mails, faxes, etc.)
• Incoming telephone calls
• Visitors to the agency
We chose these three types of transactions because they generate more than 90% of the workload in an average agency, and are easy to track.
Here are the results:
|
Department
|
Agency #1
|
Agency #2
|
Agency #3
|
Agency #4
|
Agency #5
|
|
Personal Lines
|
|
Transactions per Day
|
61.0
|
99.4
|
95.2
|
58.6
|
35.0
|
|
Transactions per Day per Employee
|
29.7
|
39.8
|
31.7
|
21.7
|
17.5
|
|
Transactions per Hour per Employee
|
4.0
|
5.3
|
4.2
|
2.9
|
2.3
|
|
Minutes per Transaction
|
15.0
|
11.4
|
14.3
|
20.7
|
26.1
|
|
Small Commercial Lines
|
|
Transactions per Day
|
30.2
|
31.2
|
48.0
|
24.7
|
43.8
|
|
Transactions per Day per Employee
|
12.6
|
31.1
|
12.0
|
12.3
|
17.5
|
|
Transactions per Hour per Employee
|
17
|
41
|
16
|
16
|
23
|
|
Minutes per Transaction
|
35.3
|
14.7
|
7.5
|
37.5
|
23.1
|
After you’ve taken a few moments to review this table, you might come up with questions such as these:
Question #1: In Personal Lines, why did Agency #1 process its transactions in less than half the time of Agency #5?
Answer: The employees in both agencies processed all the transactions they had to do. Employees can’t process more transactions than they have. It just happened that Agency #5 had more than twice as many employees processing their transactions.
Look at Agency #2 in Small Commercial Lines. Because there was only one employee, this person had to do them all!
Question #2: Did the books of business, procedures, and automation differ in each agency?
Answer: Not significantly. Personal Lines and Small Commercial Lines books are basically the same in all agencies, whether they’re direct billed or automated. The same holds for Personal Lines and Small Commercial Lines procedures. We’re talking mail, telephone calls, and visitors. More than 50% of the mail consisted of direct billed renewals and direct billed late, cancellation, or reinstatement notices — and a telephone call is a telephone call, no matter where you are.
Neither was the degree of automation a factor in the survey. Agency #2 was the least automated of the five (with manual policy information and accounting systems). However, it was by far the most efficient — with nearly twice as many transactions per employee per hour than its closest competitor, not to mention zero backlog.
Question #3: Why was Agency #2 so efficient?
Answer: The agency principal understood expense control. He informed all employees that one of the agency’s goals was to have all work completed by the end of the week. The employees have achieved this goal year after year, even with the agency growing rapidly in policy count.
Said the principal, "It’s really hard work to write new business and make the agency grow. I don’t want to do all this work and not be rewarded personally by letting all the income go out the back door in expenses and people."
CONCLUSION
The bottom line: For your agency to succeed, you need to manage your employees effectively. There’s no getting around it!
Agency owners who focus on reducing “peripheral expenses” (dues and subscriptions, education, advertising, etc.) are only dealing with pennies. If you want to deal in dollars, you must reduce your agency staff to meet your current workload.
The final installment in this article will provide guidelines for using expense controls to improve your profit margins.