ACG - Agency Consulting Group

The PIPELINE

A national monthly newsletter for agency principals dedicated to agency management topic

Customer Value vs. Customer Cost

A Chinese proverb says, “If you are planning for a year, plant grains. If you are planning for a decade, plant trees. If you are planning for a century, plant people.”

I would like to update that proverb for our time and our industry.

“If you are planning for a year, cultivate your Objectives. If you are planning for a decade, cultivate your Strategies. If you are planning for a century, cultivate your people.”

How much time do you spend looking forward?

Do you look forward for your own well-being, the well-being of your family, or the well-being of yourself, your family and your business?

A more familiar proverb was created by my father when he was trying to teach me some life lessons. “Son,” he said, “if you are constantly looking over your shoulder looking out for competitors, suppliers or the public, you are likely to run smack into a stone wall.” I guess I am a little dense, because it took about twenty years before I realized that what he was trying to tell me was, “Keep your eye steadfastly set on the future, it is the only thing over which you exert any semblance of control.”

I recently returned from a client’s Strategic Planning session, in which fully one-third of the time was spent on “blue-sky” activity to determine the future course of the agency and how to guard agency cashflow for perpetuation planning and leverage. The agency had been through five or six perpetuation buy-outs with internal staff groomed to assume control and ownership. It expects to continue this process into the foreseeable future, because it provides each new generation a “free” vehicle for agency ownership and each retiring generation a strong cash buy-out position.

This agency is cultivating objectives in the short term, strategies in the longer term, and people for its long-term future. There are no losers in this process, and the agency owners know that they will attract the best possible talent because the “new blood” is assured ownership without the need for heavy investment. The owners know that they can exert a great deal of pressure and expect strong performance from the younger stars, replacing agency (and value) growth for the dollars that they would command if selling outside the business.

The younger owners do not get away scot-free either. Since the older owners are cashed out in lump sum, they must show financial growth and profit stability to the banks that provide the leverage to buy out the agency’s owners. This requires all new owners to pledge literally everything they own to the success of the agency. These new owners now must not only continue to grow the business profitably, they must immediately plan for the cultivation of a new field of owners to take their place as successors, when the new owners are ready to cash out.

A few generations of owners determined that every new generation should continuously be under financial pressure to perform with strong downside results if the agency faltered. As a result, the agency managers find that they must constantly be aware of their operating and financial results. This is an excellent trait under any circumstances, but the pressure of a financial institution demanding annual agency values, to justify its continued support, adds a degree of pressure from external influences. This keeps everyone honest. Instead of taking that additional bonus when times are good, money is invested in relieving debt or resides in Retained Earnings for future needs. Instead of ‘flying by the seats of their pants,’ the agency follows a Plan and analyzes statistics continuously to determine if the Plan is working. Instead of competing for maximum personal earnings, each owner knows that their future is built on the team, not on their own productivity. This makes teamwork a natural benefit to all. Prospective owners search for ways to succeed, bringing them to managements attention for ownership consideration.

Not only has this method worked to cement the bonds between producers and internal managers, but it has also resulted in compensation in excess of what most of them would have expected otherwise.

The key to cultivating your people is to plant them selectively (choose employees wisely), weed them unmercifully (get rid of the poor performers), nurture the winners, feeding (paying) the successful employees well (but not more than they need to grow), and getting out of their way when they are ready to take over the garden. If you pay attention to your future, it will surely pay you off in spades.