THREE GREATEST DANGERS, THE

Rough Notes, Aug 2004 by Sitkins, Roger

Recognizing and acting upon biggest dangers to a company

One of the key roles and responsibilities of the senior management of any business is to be aware of and eliminate the dangers faced by that business. This certainly holds true for independent insurance agencies.

All too often the average (the best of the worst and the worst of the best) owner/manager simply does not want to look at these dangers. In fact, many live by the saying: "Never ask a question you don't want to know the answer to."

As I see it, the "Three Greatest Dangers" faced by the average agency are:

1. Lack of a formal selling system

2. Living in a false world of security

3. Lack of an operating profit

Let's review these three dangers and some of the strategies you could implement to systematically eliminate them.

Lack of a formal selling system

Most agency owners and producers have no formal "set offense" that they run. At best, it can be described as HAWG: Hysterical Activity on the Way to the Grave. They are totally reactive vs. proactive in most selling opportunities. Some are simply sitting in their office "waiting for the roast duck to fly into their mouths"!

The bottom line is that the sales staff does not invest the majority of their time in sales and sales-related activities. Thus, the top-line growth rate we seek, 25% plus a year, does not happen. I think it's very tough to call yourself a sales organization while not having a formal selling system.

In such an agency, there is no prospecting system, and the prospect pipelines are half full at best. There are too many "part-time clients" and not enough "full-time clients" (those who are totally cross-sold).

Solution-Determine your "offense" in the major selling areas of your agency: large commercial lines, select commercial lines, personal lines, life/health, and financial services. Make sure every player on your team knows the offense and is committed to running it. Make constant progress in your offense a major focus of the entire team!

Living in a false world of security

I see that most agency owners do live in a false world of security. They think everything is great and don't realize that they are actually very insecure. By the time this reality hits them, it may be too late to recover.

There are three specific factors that create this false world of security:

1. Pareto's Principle

2. Profitable Accounts Subsidizing Unprofitable Accounts

3. Profitable Producers Subsidizing Unprofitable Producers.

I've often discussed Pareto's Principle (the 80/20 Rule) in my articles. If it were not for the income generated by the top 5% of an agency's clients, the agency would be out of business. Yet have you reacted to it? Do you know your numbers? What would happen if you lost the top 20% of your clients?

If you are an average agency, it's very simple: The majority of your income and profits come from the top 20% of your clients. The majority of your expenses and losses come from the bottom 80% of your clients.

I firmly believe that all clients can and must be profitable. You must look at every client as a profit center. You cannot allow profitable accounts to subsidize unprofitable accounts! Every client must be a full -time client and an advocate for the agency. We must create a Trusted Advisor relationship, not a vendor relationship.

Producers must produce sales and profits! All too often we see that the owners have the largest books and are supporting the non-owner producers. Clearly, we don't expect new producers to become profitable overnight. However, until a producer develops a book of business with commission income of over $300,000, he or she is not creating an acceptable profit. The keys to producer profitability are:

Closing Ratio - If the closing ratio is less than 50%, you lose profits.

Revenue per Relationship You can't become a $1 million producer writing $1,000 accounts. You'd have to write 1,000 accounts!

Retention - Writing new business is one thing; retaining it is where the real profits come from. Are you installing The Exit Barrier Strategies we have discussed in previous articles?

Gross Commission Income - As mentioned above, unless the producer has at least $300,000 of commission income, there is no profit. Set your sights even higher-$500,000.

Lack of an operating profit

Without contingency income, the average agency has no operating profit. Let's define operating profit: Operating Income (No Contingency or Interest Income) less Operating Expenses.

The bottom line is that your agency must earn a profit on your operating revenues, and your interest and contingency income must be viewed as a bonus. Gee, this certainly isn't the first time you've heard that! However, do you plan/budget for zero contingency income? Could you operate your agency and live your lifestyle without contingency income? What about the challenges to contingency income happening in New York?

Now there are certainly other dangers faced by agencies. However, I firmly believe these are the three greatest dangers. I strongly recommend that you hold a meeting with the key players in your agency to discuss these dangers and their systematic elimination.