For many of our clients, the perceived economic benefit of a merger or acquisition is based more on the potential for increasing revenue than decreasing costs. Most of this anticipated increase in revenue is targeted to come from cross-selling and account rounding. That is because sophisticated buyers understand the latent value of the client database within under-performing agencies.
In examining why agencies have not extracted the most value from their client database, Harbor Capital Advisors has found three common reasons within the under-performing agencies.
The primary reason is simply that the agency does not understand the total value potential of the client database. This lack of knowledge is usually based on the fact that the agency management system does not provide this information and the information is too difficult to construct by other means.
Usually as a consequence of this lack of information, the agency has not constructed a plan for cross-selling or account rounding, or has developed a flawed plan.
Another important reason is that, in most under-performing agencies, responsibility for cross-selling and account rounding is delegated to customer services representatives (CSRs). The problem in these situations is that, in most cases, the agency is trying to force a round peg into a square hole. In other words, the CSR function is service and the producer function is sales. The issue is not that some people who service can't be trained to sell or that service staff should be prevented from moving into producer positions. The issue is one of job design, skill set and incentive.
In under-performing agencies, there is little perceived difference between cross-selling and account rounding. In higher performing agencies, cross-selling usually refers to selling new lines of business to existing clients. For example, selling a home or auto policy to a commercial client or a life policy to any existing client. Account rounding usually refers to selling new coverages to existing clients. For example, adding umbrella or home office coverage.
While these differences may appear subtle, they are significant when developing an effective plan for increasing revenue. The reasons are that cross-selling and account rounding require different approaches and yield different results.
The first step in developing an effective plan is to understand the economic benefit of cross-selling and account rounding. The example in the box below illustrates an economic model showing the potential for cross-selling and rounding an account base of 1,000 personal lines accounts and 600 commercial accounts with personal lines.
There are two ways to approach this. One is to develop a spreadsheet showing the existing revenue profile, then add an assumption for the number of new policies that might be added. The other method is to have the CSRs review each account in advance and determine the new coverage and policy potential. Both methods result in defined goals upon which to base the next step, which is to develop specific sales performance criteria.
Cross-selling is essentially the same as new account sales from the perspective of the producer, and so is an attractive objective. Account rounding is not as attractive to the producer since the effort reward ratio is less. In other words, the producer has to put as much time into account rounding as new production or cross-selling while the commission is much less.
To solve this problem, we recommend a compensation approach that is based on rewarding the producer for meeting the overall goal, not based on commission per policy. Once a compensation package is agreed upon, the producer should develop a sales plan similar to the plan in place for new account sales.
| Accounts | Policies | Average | Average | Total | |||||
| Premium | Commission | Commission | |||||||
| Home | 600 | $850 | $145 | $86,700 | |||||
| Auto | 900 | $1,200 | $156 | $140,400 | |||||
| Boat | 25 | $120 | $14 | $360 | |||||
| Floater | 30 | $80 | $10 | $288 | |||||
| Umbrella | 90 | $90 | $11 | $972 | |||||
| Life | 10 | $600 | $300 | $3,000 | |||||
| Total | 1,000 | 1,655 | $140 | $231,720 | |||||
| Avg. Per | 1.7 | $232 | |||||||
Account
| Accounts | Policies | Average | Average | Total | ||||||
| Premium | Commission | Commission | ||||||||
| Add 100 New Home Policies | 700 | $850 | $145 | $101,150 | ||||||
| Add 100 New Auto Policies | 1,000 | $1,200 | $156 | $156,000 | ||||||
| Add 50 New Boat Policies | 75 | $120 | $14 | $1,080 | ||||||
| Add 50 New Floater Policies | 80 | $80 | $10 | $768 | ||||||
| Add 50 New Umbrella Policies | 140 | $90 | $11 | $1,512 | ||||||
| Add 200 New Life Policies | 210 | $600 | $300 | $63,000 | ||||||
| Total | 1,000 | 2,205 | $147 | $323,510 | ||||||
| Avg. Per | 2.2 | $324 | ||||||||
| Account | ||||||||||
| Commercial | 600 | $194,106 | ||||||||
Accounts
In the illustration, meeting 100% of the sales goal would result in approximately $92,000 in new personal lines revenue from existing personal lines accounts. New personal lines policies sold to existing commercial accounts would result in an additional $194,000 in new personal lines revenue. Total new revenue to the agency would be $286,000. Retention would, of course, increase the economic benefit over time.
This model presents a top-down, economic view of the cross-selling and rounding potential within the agency. How close the agency comes to reaching its goals depends on how well the plan is executed. Within higher performing agencies, cross-selling and rounding are given high priorities, with allocation of resources to get the job done.
Your attention to cross-selling and account rounding could make the difference in whether you're a buyer or a seller. *
The authors
Paul J. Di Stefano, CPA, CPCU, is managing director and G. Edward Kalbaugh, MBA, is director of management advisory services for Harbor Capital Advisors, Inc., a New York-based investment bank and consultant to the insurance industry. They can be reached by e-mail at harborcapitaladvisors@banet.net or by phone: (800) 858-2732.
©COPYRIGHT: The Rough Notes Magazine, 1999