Eventually you’ll leave your agency. What will it be worth?
At the end of the day, there are really only two things that matter in an independent insurance agency: Sustainable Growth and Sustainable Operating Profit. I’m not talking about sporadic growth and sporadic operating profit, but rather systematic growth and systematic operating profit. Both must have momentum to be sustainable.
For most agency owners, the agency itself is their largest personal asset. Like any asset or investment, it must be managed properly in order to produce an acceptable ROI (although a more accurate term might be ROO—Return on Ownership).
One of the BFOs I have had over the years is that eventually everyone will leave their agency, regardless of why or how. You’re either going to sell internally or externally, or your estate will do it for you. Some day, some way, somehow, it will be sold. Therefore, I think it only makes sense to grow your asset. Why wouldn’t you?
In my last article, I discussed our GrowFit™ Key Performance Indicator (KPI), which combines your Top Line Revenue Growth and Bottom Line Operating Profit. If you have 10% revenue growth and 10% operating profit, your GrowFit is 20. Our model, The Vertical Growth Experience™,calls for a minimum GrowFit of 25 with a target of 40+.
You can’t do that without growing your revenue and your operating profit. To accomplish as much, the following strategies should be in place:
Revenue growth. Agencies that enjoy sustainable revenue growth have a formal selling process for each of the following account types:
• Large commercial lines
• Small “select” commercial lines
• VIP personal lines
• Regular personal lines
• Employee benefits
These processes define what you do, how you do it and why you do it. Unless you establish and implement them, your sales will be sporadic at best.
I can’t tell you how many times I’ve asked agency owners to describe their selling process and watched their faces go blank! Typically I get no response (other than that blank stare) although occasionally I’ll hear a rambling account of how “we go out there, we meet people and take a look at their insurance.” That’s not a selling process—it’s a quoting process! And by now, I hope you’ve read or heard my ideas on practice quoting (don’t do it!) And that you understand why the best day to lose the sale is the first day.
What I’m referring to are formal, process-driven, non-traditional approaches to marketing and selling to new clients. These include the following tried-and-true strategies for generating additional revenue:
Cross-selling. Clearly this is one of the most talked about but under-implemented ideas among independent agencies. We still see that 66% of personal lines and 49% of select commercial lines are single-policy accounts. The challenge here is to stop taking orders and start selling full-time clients only—no part-time clients!
I’m reminded of a study we did recently for one of our member agencies whose single-policy customers comprised 68% of its personal lines business. To lower that percentage, they established a rule prohibiting single-policy sales to their personal lines customers. As such, when someone calls the agency for a quote on automobile or homeowners insurance, the CSR (account manager) agrees to do so—conditionally. Typically the CSR will say something like, “We’ll gladly provide a quote, but in order to properly meet your needs, we need to look at all of your personal lines coverages. If you decide not to place all of them with us, that’s fine. You can stay with your current agency. Or you can come with us and see that we do a superior job of coordinating all of your coverages.”
By making that one change and implementing a rounding-out process, that agency went from 68% single-policy customers to just 42% within two years and down to 24% single-policy customers a year later! That’s a huge change in revenue and an even greater change in profit, all because they had buy-in from the CSRs. They understood that not only were they doing the right thing for the clients, they were also increasing client retention and, therefore, agency revenue. In the process, they were dramatically increasing the agency’s profitability.
Contingency/Profit-sharing income. I’m continually amazed that so many agency owners are shocked at the number of commercial lines carriers they have and the fact that they’re not maximizing those relationships.
At a conference last year, one of our Sitkins International members admitted to me that by not consolidating markets and negotiating aggressively with carriers on the contingency contract, his agency lost at least $500,000 of profit-sharing income. I can tell you that they have since addressed those issues and, while always doing what’s best for the client first, are now aggressively managing their contingency income!
At another agency, the problem stemmed from ineffective management. Although the president/CEO was a terrific salesperson, he loathed being a manager and was ineffective in his day-to-day management role. He particularly despised the idea of discussing profit sharing with carriers. To remedy the situation, we helped select a new agency president, whose primary responsibilities included meeting with carriers, consolidating volume, negotiating the very best deals and hitting all agreed-upon production goals with the carriers. We told him that if he achieved these objectives, he would receive 10% of the increased income as a bonus. That year he increased agency profit sharing by approximately $250,000 and received a $25,000 bonus—I’d say that’s a pretty good return!
Pipeline management. At most agencies, the Monetized Value of Pipelines (MVP) is deplorable! The producers simply aren’t spending sufficient time on developing overflowing pipelines. Accordingly, most of them have more time than opportunities and zero walkaway power.
As I’ve discussed many times, when you look at what’s in your pipeline (solid prospects, not suspects), you need to know your closing ratio and conversion ratio. That tells you your MVP. If you have any chance of hitting your sales goals, your MVP must be two times your annual sales goal (e.g., $100,000 sales goal = $200,000 of MVP). Obviously, if you want to grow your revenue, you must have both quality and quantity of at-bats at very high levels.
Visible goals and peer group pressure. Most people who like to win hate losing in front of their peers. That’s why we strongly believe in having goals and results visible for the entire organization to see, whether it’s written on a flip chart in the conference room or posted on the agency Intranet. Typically, having those goals displayed for all to see—declaring what you intend to do and then showing whether or not you did it is a major incentive to perform.
Operating profit. To make sure we’re all on the same page, let me start by defining Operating Profit. This is the money you make from selling and servicing insurance without contingency or investment income. In other words, it’s what you make from your business operations. Any additional revenue is considered Non-Operating Profit.
Do you earn an acceptable profit doing what you do for a living? Our Vertical Growth Experience® model calls for an operating profit of 25%. Many times when I mention that figure on Webinars or at seminars, people say, “Wow! How do you do that?” Well, guess what? There’s no magic here! If you want to make 25%, you can only spend 75%, since the total can’t exceed 100% of your income!
A financial model. Achieving a 25% profit requires a financial model. Ours is The Four 25s, in which the agency’s total financial pie is evenly divided into four categories with each accounting for 25%.
Operating profit 25%. Here, the bottom line becomes the top line.
Sales expenses 25%. Most people will challenge this one, but it definitely is possible IF you have a huge percentage of revenue without a producer tied to it (i.e., no commission paid out). While this is one way to get profitable in a hurry, it’s also the least likely way for most agencies to do so.
Salaries 25%. This is what you pay all employees, other than salespeople.
Service and administrative expenses 25%.
The nice thing about The Four 25s is that it allows you to take a true zero-based budgeting approach every year, which is a concept I believe in. However, it seems to have fallen out of favor over the years because it requires scrutinizing every single expense and questioning the reason for the expenditure. Consequently, this level of expense control has become a lost art at most agencies.
Key performance indicators (KPIs). Your management decisions should be tied to your agency’s KPIs. Let’s say you have a goal of Revenue per Employee of $175,000 and one of your managers requests an additional employee for his or her department. As a senior manager, you should ask how that additional employee will directly or indirectly help the agency generate $175,000 in revenue. If the manager doesn’t have a plan outlining exactly what the added employee will do to generate that amount, then your answer is simple: No. However, if the manager’s plan clearly documents how the new hire will enhance revenue, then adding an employee may be justified.
In KPIs, there are two stats you need to look at: Outcome Stats and Performance Stats.
Outcome Stats have the end in mind and encompass Revenue, Operating Profit and GrowFit Number. Performance Stats drive the Outcome Stats and include: Revenue per Employee, Revenue per Validated Producer, Revenue per Relationship (on A, B and C accounts), Closing Ratio, Conversion Ratio and Retention.
The bottom line
So what really matters most? I believe it’s your GrowFit number and your agency value. If you improve your growth and profit, you will increase value exponentially.
This is where I usually say, “It’s your choice.” However, this time I’m compelled to change it by asking, “Do you really have a choice?” Remember, eventually you will leave your agency! What will it be worth?
The author
Roger Sitkins is founder and chairman of Sitkins International, a private client group and membership program for some of the top independent insurance agencies and brokerages in the United States, Canada, and Latin America. Members participate in training, advising and networking opportunities focused around innovation, sales, growth, profitability and value. Sitkins International is inventing the future of the independent insurance system by providing intellectual property that empowers agents and brokers to become the innovators.
© The Rough Notes Company. Reprinted with permission.