by Kevin Stipe, April 2005

National Underwriter

The future has arrived.  You knew it was coming - but are you ready?

With organic growth rates plummeting, many insurance agencies are seeing their growth rates slow into single-digits for the first time since the late 1990s.  The great run of the past five years had to end some time - and the second half of 2004 was clearly the turning point.  The figures in the table below paint a pretty grim picture - and keep in mind that for the most part, these numbers don't reflect fallout from the Spitzer mess!

 Growth Rate Excluding Acquisitions
 

Despite the disturbing picture, there is a group of Best Practices agencies out there that truly are ready to prosper during tougher times.  Although each is unique, they share one common attribute that will allow them to succeed, even if the market enters another long-term down cycle.  What is that "one thing?"

They've developed a sales culture.  They've accepted the fact that growth (not simply retention) of their client list is the path to success.  They've renounced their belief in the false choice between a "sales culture" versus a "service culture," recognizing the winning path is a relentless pursuit of both.  And their results thus far are showing that double-digit growth is still possible, even in this market.

The question we are most frequently asked is "Assuming it is possible to create a sales culture, what are the steps that must be taken to get there?" Here are three observations of firms that we've seen make real progress in transforming themselves into true sales organizations.

1. Sales Culture agencies recognize that not all who carry the title of "producer" are really producers - and then do something about it.  A client of ours became increasingly frustrated that several of its producers consistently fell short of their sales goals.  These "producers" were valuable employees - their superior technical and relationship skills made them great at holding on to customers - but they simply didn't produce new business.  Our client slowly realized that this chronic underperformance had spread like a cancer throughout the company.  Other employees followed suit.  If the producers weren't required to live up to their sales goals, why should everybody else be held to a higher standard? The firm's ability to build a culture of accountability and discipline was being undermined.

   Finally, our client decided the situation had to be addressed.  The CEO got up at a sales meeting and explained that the title of "Producer" would in the future apply only to those individuals who consistently generated new client relationships.  If a producer (no matter how large his book) failed to live up to a minimum standard of new business generation for two consecutive years, his title would change to "Account Executive" and he would be placed on a salary plus bonus arrangement, with his performance measured primarily by account retention.

   The CEO put it well when he said afterward "we simply could no longer tolerate service people masquerading as producers."  The genius of the CEO's solution was that it didn't put agency management in the position of declaring who was and who wasn't a producer, but instead let the producers decide - by their own performance.  A year later, the sheep were truly separated from the goats - and a major step toward agency-wide accountability was achieved.

2. Sales Culture agencies are breaking up the old client service model and replacing it with a team-based approach.  Sales culture agencies are recognizing that their production support model can be the difference between success and failure.  One of management's most important jobs is to equip producers so that they have enough time to dedicate to new business development. 

   Are your top producers getting to spend at least 25%-35% of their time soliciting new business? If not, you probably need to revamp your service model.  For smaller agencies, the first step is often to take certain tasks, such as claims handling or new business placement, out of the hands of CSRs and consolidating them into the hands of a dedicated specialist.  For larger agencies, it often means creating an entirely new position - such as an Account Executive - who is placed between the CSR and a top-performing producer.

   In our experience, most agencies need to re-evaluate their entire service model every 3-5 years to make sure that it still fits their customers and their producers.  Your producers - every single one - must have enough time available to generate new commissions equal to 15%-20% of their book each year.

3. Sales culture agencies are spreading stock ownership broadly among their high performers.  We are frequently asked this question by agency principals that are being pressed to spread ownership: How many shareholders should an agency have?  The Best Practices Study provides a surprising, but simple-to-grasp answer.  Once an agency grows beyond $2.5 million in annual revenue, it adds approximately one shareholder for every million dollars in growth.  This means Best Practices agencies with $5 million in revenue normally have five shareholders.  $50 million revenue agencies have 50 shareholders.  Although this may appear over-simplistic, the pattern among Best Practices agencies is undeniable.

The two most important ownership issues are 1) who should own it, and 2) how much should they own.  In our experience, a healthy way to address this is to work backwards.  How much value does a given individual create each year?  Agency value is created by those activities that increase the growth and profitability of the agency, such as new business generation, agency leadership, attracting other talented employees into the company, sales management, etc. 

A good starting point in determining how much of the agency each shareholder should own is roughly 6-8 times their annual value creation.  If every shareholder owns roughly 6-8 times the amount of value they create each year, an agency's value will grow by roughly 10%-15% per year.

After having doubled their value between 1999 and 2003, many agency principals are starting to realize the next 4-5 years will make for a tough encore.  Whether they double in value or not, the Sales Culture agencies will be leading the pack.

Kevin Stipe is a senior vice president and principal of Reagan Consulting, Inc., an Atlanta-based management consulting firm that developed and produces the "Independent Insurance Agents and Brokers of America Best Practices Study."  The Best Practices Study may be accessed free of charge at Reagan Consulting's website www.reaganconsulting.com.  Kevin may be reached at (404) 233-5545 or by email at Kevin@reaganconsulting.com.