How to Do It — AND – What Does It Mean
Many agents know Agency Consulting Group, Inc. from its annual Composite Groups of Agency Performance. Since we automated the process on our website a few years ago, the Composite Groups have grown substantially and benchmarking your agency against your peer groups has gotten even easier. It will now take you approximately ten minutes to enter the data to add your information into the national database and to receive your password to checking the Composite Group results, at your leisure, for a full twelve months.
Giving you access to the Composite Groups as the data changes (daily) is our way of thanking the thousands of agencies who have updated their Operating Statement and Balance Sheet information annually. You can use this benefit to measure your progress toward expense controls and productivity increases. And, of course, the Quick Analysis is always available to you. For only $30 Agency Consulting Group, Inc. will compare your data against that of the Composite Group of agencies of your size nationally (and even those in your State if sufficient agencies from your state have entered their data).
And, best of all, your confidentiality and anonymity continue to be GUARANTEED!
When you enter your data, your agency identifiers go to one database and all of your agency financial information goes to another database. That’s why we can only perform a Quick Analysis when you first enter your agency’s data – after that we have no idea which agency belongs with which data set.
Since we automated Benchmarking we have added several features that have attracted attention.
First, we are now including premium growth in the major lines of personal and commercial lines of insurance. During the input, you are asked to enter last year’s and this year’s premium volume in each of the major lines of business in both personal and commercial lines. The result of all agencies entering this data is that we can reflect back to you how your growth by line compares to other agencies a) of your size countrywide, b) within your State, c) by agency size within your State, and d) within one of several Associations and Interest Groups (like IIABA, PIA, IMMS, etc.). If you know a special group who would like their own segregated database, we are freely offering those services to carriers and associations to assist in their evaluation of their productivity.
Second, we are stressing Balance Sheet Liquidity Ratios (see article in this Issue of the PIPELINE0, the measure of an agency’s health. Too may agents pay no attention to their Balance Sheet and gauge their total progress by virtue of their Operating Statement (Profit & Loss Statement). While this statement is important, the Balance Sheet actually measures the health of the agency at a point in time and should be analyzed carefully by agency management. The agency is requested to input the basic information from its balance sheet for both last year and this year and our Benchmarking program compares the agency against its history and against the standards of liquidity of healthy insurance agencies.
A number of agencies have asked us to explain how to use the Benchmarking results that they have realized from their input. No line of revenue or expense stands on its own if it deviates from the average in either a positive or negative direction. For instance, if P&C income (commissions) is far above or far below the average percentage of total revenue, you may be concentrating on personal and commercial lines instead of devoting any energy to L&H production or fee income. But it can also mean that you are so profitable that your contingency income is a higher percentage of total revenue than that of the average agency. You must look at all factors before drawing conclusions, positive or negative.
We were recently contacted by an agency whose input reflected Occupancy expense (as a percentage of net revenue) of 6.4% compared to 4.2% for the Composite Group agencies. The agency was concerned that they were overpaying for space, light and heat, the components of Occupancy. We quickly realized that they were in the center of perhaps the most expensive city in the U.S. That’s why their occupancy costs seemed so high. But we also alerted them that agencies in the cities who experience higher than industry average operating expenses associated with their location must (and most do) concentrate on higher value clients. Either the standard client brings them higher premiums (and commissions) to offset the higher operating costs because of the normal trends of rates in the high cost-of-living parts of the U.S. or the agencies in those areas concentrate on larger personal and commercial accounts.
So the good news was that the higher occupancy expenses they experienced were normal for agencies in their locale, the bad news (determined in an agency analysis that we subsequently conducted for the agent) was that they were marketing to clients much too small to support their expense structure. As a result, we helped the agency design incentive compensation for their producers that directed and rewarded them more for larger accounts than for smaller ones (they stopped paying commission below a specific tolerance level) and helped them create and implement marketing programs that changed their average client from $1,477 in commission per year to $3,265 average commission per year within 36 months. Not only did they resolve the Occupancy issue as a percentage of Net Revenue (it is now 4.1%), but they are also dropping much more to their bottom line – all as a result of Benchmarking, asking questions about the aberrations and using them to take long-term corrective action.
Most agent don’t realize the major benefit of their benchmarking until they are almost done. We’ve always considered agency productivity to be the major reason to benchmark operating statements. Revenue per Employee is the raw measure of agency productivity. Compensation per Employee is the rather uncontrollable expense that must be paid to achieve skilled and productive employees. The difference between Revenue per Employee and Compensation per Employee is SPREAD, the real measure of productivity that gauges the revenue per employee excluding compensation that is available to pay general overhead and PROFIT. Since most non-compensation overhead is generally controllable in an agency, the greater the SPREAD, the greater the profit margin for the agency.
Revenue per Employee, Compensation per Employee and the resultant SPREAD can be “engineered” by an agency to improve to the result of higher profits within a Strategic Plan developed to increase productivity annually. While agents are certainly invited to measure their productivity against Agency Consulting Group, Inc.’s Composite Groups, we must remember that we have invited large numbers of agents to participate (compared to the relatively few agents invited to participate in Best Practices studies). We represent the “AVERAGE”. And while it is commendable to measure yourself against the industry averages, that calculation is just to be used as a benchmark, not as a goal. NO ONE STRIVES TO MEET THE AVERAGE.
If you are not as productive as the averages, certainly do what’s necessary to increase your productivity. We can and do help hundreds of agencies each year enhance their productivity. However, your best measure is against your own agency history. Whether you are below, at or far above the benchmarks of the national, state or association averages, you should always strive to increase your own agency’s performance compared to your own history.
We invite you to Benchmark your agency at www.agencyconsulting.com — benchmarking section. When you gauge your own results compared to your peers (or let us do it through our Quick Analysis), don’t hesitate to call our 800# (1-800-779-2430) to review the results and ask questions. This is the fastest way we know to understand where you need improvement to maximize your agency’s value, productivity and profitability.