I recently visited a new doctor, Dr. Bambootz. I know that he’s competitive because I asked him his prices for his exams and his procedures and they were the lowest among the 12 doctors I called to get pricing. I was surprised that some of them seemed offended by the question and refused to answer. But I learned from all of our agent friends that price is the only consideration that most consumers use – so I went with the lowest bidder.
And my visit was among the shortest and most efficient that I’ve encountered among doctors. There was no one in the waiting room, so I got in quickly. This was our first visit and I was interested in finding out about my physical condition.
Dr. Bambootz asked me how I felt and I told him that I generally felt fine but I had some indigestion problems occasionally, I had headaches in the evenings and my neck hurt sometimes. He proved his intuitive value by telling me to take antacids when I had indigestion, to take a few aspirin when I had a headache and that my neck problems were probably arthritis and that he would prescribe muscle relaxants for me.
No muss! No fuss! I was out of there in 10 minutes with a clean bill of health. And we didn’t need any of those blood tests, x-rays or other diagnostic tests that cost so much money.
Unfortunately, that’s the way many agents run their business. When we ask our “How do you feel?” questions, we often get a “We’re doing fine ‘under the circumstances” and they continue to do what they’re trained to do, help clients with their insurance and insurance processing needs. Sometimes the only indication that something is wrong is when the agents put less money in their pockets year-by-year.
In reality, I am attended by a family doctor who hung a large sign in her office telling her patients to be patient, that she treats every patient like her best friend, taking as much time with them as they need to identify and treat their particular conditions.
Yes, I wait for her. But when she sees me she is well versed in my medical history, has already analyzed the tests that she insisted should be run a week before my visit and sits with me to analyze my progress, the test results and to strategize our next steps in my physical well-being.
When we, as consultants, visit an agency we precede that visit with a request for a lot of specific information about the agency’s history, staff, clients, financials, carriers and operations. We do so for two reasons. First, we need this information in order to fully understand the agency and its situation. If we count only on the conversations we have with owners and staff once we arrive on site, we will get a lot of “we’re fine” until we win their trust and confidence. The data gives us insights and points out ‘red flags’ to further question when we visit. The second reason we ask these questions is to determine how much the owners and managers understand about their own business.
If you are a sole proprietor with no employees, your job is as an insurance agent, concentrating on selling and servicing insurance for your customers. But as soon as you gain employees your job becomes managing a business to desired growth and profit. Secondarily, you are still an insurance agent in order to sponsor your business goals.
When you have a staff of five, or fifteen, or fifty, like it or not, you become a businessperson more than an insurance agent because not managing your staff properly could ruin you much quicker and more certainly than anything you could do as a simple insurance agent. Unfortunately, many agents never convert from individual performers to business managers. If they did, they would realize that the most important thing they have is information. It is the key to performance, growth and profitability in an agency.
What information is important? That differs by agent. Some want to know everything that goes on in their businesses every day. Others are satisfied with indicators of business strength and will analyze any areas of concern more closely as they are identified. There are some basics that should be common knowledge on a daily, weekly, monthly and annual basis for all agency owners and managers.
Key Indicators of Business Development:
1. Revenues, Expenses and Profit on a Year-To-Date (YTD) basis for current vs. prior year – one would think that this basic knowledge is automatic in every business. It is not! We encounter far too many agencies that operate on the basis of their bank account alone. Of course knowing that you have enough money to pay your bills is important. But operating on that basis without a point of comparison and explanations of deviations spells disaster for any agency owner.
You are managing on a day-by-day basis and it’s not a matter of whether a crisis will occur in your business, it’s simply a matter of when it will occur. Looking at your revenues (by type), expenses (by category as a minimum and by line as the optimum) and net profit on an on-going year-to-date basis and compared to prior year-to-date every month tells you when either good or bad things are happening with enough time to either take advantage of potential strong times or to forestall up-coming weak times.
Advanced agencies are also reviewing these categories on a Rolling 12-month basis and against dynamic budgets. A view of a Rolling 12-month operating statement (in which you view a full year of results every month, dropping off the oldest month and adding the most recently completed one to the view) every month tells you whether and where the agency is strengthening or weakening on a trended basis. Any month, viewed alone, can look either very good or very bad. We cannot manage our businesses by the results of any single month. But a YTD or rolling 12-month view gives you a much better perspective in which to take remedial or development action.
The most advanced businesses prepare a budget, recognizing trends and projected expenses and revenues from your two primary revenue sources, retained business and growth business. Comparing your YTD results against budget lets you know whether you have a good grasp and control of your expenses and if your retention expectations and new business is on track to generate the profit results that compensate agency owners for their investment.
2. New Business and Lost Business – Agency management systems can give us this information but many agents simply never ask or look at net growth of customers and revenue changes by line and by division (PL,CL, L&H,etc). Why is this important?
Most agents are at least cognizant of the New Business that their agency writes, although it is shocking how many don’t even know this basic measure of success. But even those who recognize NB as a measure of success do so casually because they don’t understand the importance of net growth of the book of business. Your business life is based on GROWTH OF CUSTOMERS even more than on the policies they purchase, the premium they pay or the commissions you generate on that premium. The reason is that a growing customer base will give you more dollars, more opportunities for cross-sales, and more opportunities for referrals in the long term. Agency value is tied, in part to the number of customers you have and whether that is a growing, stable or deteriorating number. Sure, in a soft market each customer may be worth a little less in commission, but soft markets are always followed by hard markets and as long as customer growth continues, you will do just fine in the long term.
The weekly measure of Net Growth is New Customers – Lost Customers on an on-going year-to-date and rolling 12-month basis. Your goal should be to simply grow your net customer base every week. Having a net positive Net Growth on a Year-to-Date basis is acceptable. Having a net positive Net Growth on a rolling 12-month basis is crucial. Without that, you are trending toward a shrinking business.
The advanced agencies also track “annualized” revenue net growth. Many policies, especially personal lines, are written for shorter than annual terms. Annualizing new policies for measurement purposes and similarly annualizing lost business lets you know whether you are writing more or less revenue per customer as you grow or lose customers.
3. Production of Employees – Asset Protection Model agencies (our Relationship Selling model) and Incentive Compensation Program agencies (our program to pay employees based on productivity gains instead of on longevity) already measure this critical element of agency success.
What is employee productivity? In its basic definition it is what an employee accomplishes in the period studied.
We hope that every employee does some form of work unit. Most employees in agencies respond to clients’ transaction needs. That could be from a phone call, mailed request, e-mail, fax or procedural transaction (i.e. policy review or check). Do all employees in common jobs do the same amount of work? Do they do it equally well? Do they have backlogs? What is their workload capacity? Are they getting more or less bogged down in work and backlog? Do you have capacity to grow before hiring additional people?
These issues are measured by the Productivity Factors – Incoming efforts and Backlogs.
On the Incoming side, we measure all work being given to an employee on a daily basis. How much mail do we give them? How many calls, faxes or emails do they receive? How much processing work do we give them? These define how much work is available for them to do. Some proactive employees also have work that they create through outbound cross-selling opportunities that should also be counted.
On the Backlog side, we ask each employee how much work is left to be done at the end of the week that could be worked on if the employee had more time. Suspended or diaried items are not included because the employee could do nothing with that item until the reason for the suspense is answered.
The measurement is defined by taking the prior week’s backlog, adding the current week’s incoming work and subtracting the current week’s backlog. The result is Production. Production is tracked week by week to determine an employee’s (or a department’s or the agency’s) workload capacity. On the individual basis you can determine who your strong performers are and who your weak links are. Do you really want to pay the same to someone completes 150 items per week as to someone who can only manage to complete 75 items/week? Most agents sense who is strong and who is weak, but they have no evidence to prove that empirically.
On a department or agency basis production capacity and backlog status helps determine staffing needs. Backlogs for an individual, a department or the agency above 3-5 days of average production mean that you are not providing the grade of service that is common in agencies around the country. Some agents become inured to large backlogs and don’t react until they realize that severe backlogs result in multiple contacts by clients (who have no confidence that the agency will process their need or request in a timely fashion). Multiple contacts mean more work per transaction and per customer and lower productivity for the agency (in terms of revenue per employee).
4. Agency Productivity – There are three common measures of agency productivity, Revenue per Employee, Compensation per Employee and Spread (the difference between the first two). This measure should only be done on an annual or rolling 12 month basis. While we maintain records of the growth of agency productivity over the past 22 years (courtesy of our Agency Benchmarking project), the proper way for an agency to use this measurement tool is against its own history. For the agencies studied in the Benchmarking project, the average revenue per employee has exceeded $100,000 ($106,605 revenue per employee over 72851 employees in 4436 agencies). The average compensation per employee in the studied group is now $68,777 and the average Spread (defining the revenue per employee available to fixed overhead and profit) is a bit over $35,000.
However, what’s much more important is that you track your own productivity factors and work toward enhancing each every year. We should WANT to pay our staff at the top end of the scale, but we should expect more revenue per employee and a strong Spread as the result.
If you measure nothing more than these critical items, you will find out more about your own business than you ever knew and will realize what you need to do to enhance your growth and profit while you remain active in the business and your agency’s value when the time comes to perpetuate it and gain the full value of the asset for which you have worked so hard during your career.