We are never shocked by how little most agents know about their own businesses. We are all so busy doing the job that we never take the time to determine HOW WELL we’re doing the job. Stephen Covey describes his 7th Habit (The Seven Habits of Highly Effective People) as sharpening the Saw – taking time from ‘cutting down the trees’ to see where you are and make sure your tools are still sharp.
But without knowing where you are in the agency you are an insurance agent (an individual performer) with some folks working for you, not acting as an agency owner (a business owner). In order to secure your future value in the agency asset you must learn how to manage and monitor your business.
We teach insurance agencies how to create and manage their own metrics. The beginning of agency metrics is their checkbooks. If agents do nothing else well, they understand (unlike our government) that you can only spend the money that you have. Most agents quickly graduate to the creation of monthly and YTD Operating Statements that operate as basic agency metrics if they also look at the prior year’s same month and YTD. This way they can see how they doing financially from one year to the next. Unfortunately, many agencies stop their metrics at Operating Statements.
Financial Metrics
Income and Expense reviews on Operating Statements are fine beginnings to management but the publishing of those reports are so much more important if you set a budget that tells yourself what you expect to generate and spend each month and YTD. After all, one primary reason you’re in business is to make money. A goal of the Strategic and Tactical Planning Process is to determine as early each year as possible how much money (profit) you will make each year. If you set Objectives for the agency each year (beyond “to generate as much commissions as possible and to do so as inexpensively as possible”) a budget becomes the tool by which you can measure the success of each objective. Every objective has a cost in time and material and should bear a goal for measuring its success.
Once you have captured the concept of planning and monitoring operating income and expense to desired profit goals you are ready to ‘graduate’ to measuring the health of your agency – its Balance Sheet.
Imagine the Operating Statement equivalent to taking your temperature to see if you’re well or ill. In this example reviewing your Balance Sheet is akin to doing blood work an EKG and an EEG to go deeper in the analysis of your overall health. What medical diagnostics does for your doctor’s analysis of your physical health the Balance Sheet does to judge the agency’s liquidity and overall health. In many ways the balance sheet is much more important to determining if your agency’s health is stable, deteriorating or improving.
And the Balance Sheet is both the most important and least understood analysis tool in agencies. We recommend that you review our articles on the subject (send $25 to Agency Consulting Group, Inc. 507 N. Kings Hwy, Cherry Hill, NJ 08034 to be mailed seven articles that form a primer on the subject of insurance agency balance sheets).
If you create and review your Budgets, Operating Statement and Balance Sheets you have a good grounding in the financial condition and health of your agency. Remember, there are two types of people, those who want to manage their health and those who avoid any analysis of their health for fear of what they will learn. Which type are you?
Production Metrics
It continues to astonish us how few agents know or track how many clients they write and how many they lose. Clients are the heartbeat of the agency. Your life depends on keeping as many as you can (for your future income) and getting more every year. Premiums go up and down based on your carriers and the market in your area. Commission reacts directly to Premium. That’s why it is possible to have commission retention over 100% (when you lose less commission from lost customers than you gain from rate increases) and not be successful or have an 80% commission retention (when you keep all your customers in a soft market in which rates and premiums for all decrease) and have a great retention year. But if you lose more customers than you gain every year, you are classified as an Eroding Agency and your value will suffer (since your earnings potential likely deteriorates with the loss of customers unless you are losing small customers and gaining large ones).
Certainly track your new business and retained commission dollars each year, but be certain to track new, lost and net growth of customers every year.
Productivity Metrics
The gross measure of agency productivity is Revenue per Employee. It can be monitored for Operating Income (commissions and fees) and/or for Total Income (including contingency and other sources of income).
Since Compensation is every agencies primary expense, we also track Compensation per Employee (compensation is not JUST wages and commissions. It includes all benefits costs and payroll taxes.
Spread is the net of Revenue per Employee less Compensation per Employee. This is a refined measure of agency productivity because it defines the revenue per employee (after compensation) available to overhead (which is a set of relatively controlled expenses) and to profit.
The most advanced agencies define these measurements by department, office or work group to determine which teams are making money and which are costing more than they generate.
Marketing Metrics
Whether the Yellow Pages (passive) or target marketing and direct mail and email campaigns, most agencies spend some money on marketing. The most advanced agencies understand that referrals are the best way of getting customers but as insurance buyers have ever more options for their insurance, the referral stream is drying up unless you have implemented our Active Referral Program (call me for more info 800 779 2430). Marketing is always ‘iffy’. Is your advertising and marketing a good investment or is it flushing money down the drain to assuage your ego for name recognition? I know what the advertising firms and marketing companies claim, but how do you know?
Every advertising method and every marketing program bears a cost. Echoing the title of this article, If you can’t measure it, you can’t imagine it!
This means that you need to monitor the results in both activity and in new business generation (clients and income) to determine whether your marketing and advertising dollars are well spent. If you are suspicious about the financial benefit of most marketing – you are very wise – most advertising and marketing does little to boost your income. But we don’t know for sure so we throw thousands down the rabbit hold of marketing each year hoping that the image building will bear fruit. We have had agencies simply stop all marketing for a year and most found that they increased their income by no less than the cost of the marketing and advertising. They either wrote the same amount of business without the marketing or the amount written was much less than the savings from cessation of advertising and marketing.
We are not advising you to stop marketing! Effective marketing works but only if the marketing is active, not passive. Active Marketing means that agency sales staff takes outbound action (sales calls) on every prospect contacted in Drip Marketing efforts (small numbers of items released every day instead of massive numbers released at once). Passive marketing is defined by methods like the phone book and newspaper/tv/radio/Internet when a message is seen for milliseconds and only bears fruit if the suspect contacts the agency. Passive marketing boosts image if repeated sufficiently but doesn’t yield sufficient direct results to warrant their cost otherwise.
We are suggesting to you that any advertising you do and any marketing programs, campaigns (multi-step) and efforts (single shot) be required to have their results monitored. That means that you ask anyone who calls for a quote where they found you (to identify the source of contact) and that the monitoring continue to policies written and commissions generated so that at the end of each effort you have knowledge of both the cost and the return on every marketing or advertising effort. Some can be done on the short term (the term of the campaign and several weeks thereafter) and others will be measured long term (annual measurement for the effects of the phone book advertising if you still use that medium).