GROWTH STRATEGY REVIEW
Long-term planning begins with examination
of agency's strategic components
By G. Edward Kalbaugh
Every agency principal must exit at some point, and it is in his or her best interest to ensure that the agency has achieved the maximum value possible.
After her husband died, Margaret was shocked to learn that the agency which she and her husband owned was worth much less than she had anticipated. Forced to sell due to her own health problems, Margaret learned that her annual payout was going to be less than her husband's income had been from the agency. Worse, the payout would end in three years.
While Margaret is a fictitious character, this example is not. Many agency principals neglect to build agency value, focusing instead on dealing with day-to-day operational issues. And that is a mistake.
Every agency principal must exit at some point, and it is in his or her best interest to ensure that the agency has achieved the maximum value possible. Addressing strategic components of value will help agency principals achieve this goal.
In addressing these strategic components, it is important to keep in mind that they are not the same as traditional "best practices" benchmarks that measure internal efficiencies. These strategic components are the key focus of experts when considering agency value.
Sustainable top line revenue growth
Sales may be an obvious area of focus. But the real keys here are 1) the agency's ability to demonstrate that revenue is increasing at a certain rate, and 2) that the rate of increase is sustainable over time.
These key points are important because they demonstrate that the agency has certain fundamentals in place that will ensure that a certain level of revenue will occur in the future. These fundamentals include:
* Competent producers
* Structured sales processes
* Appropriate products and services to sell
For example, in one agency there were three outside producers and two owner/producers with adequate personal lines and commercial lines markets. Personal lines sales were growing but commercial sales were flat. Upon examination we found that the agency had a good sales process in place for personal lines, but none for commercial lines. Commercial lines producers, who were the owners, were left to their own methods.
The solution was to implement a structured sales process for commercial lines, along with a program where one of the personal lines producers was mentored and trained in commercial lines by one of the owners. A client service agent, who demonstrated a talent for sales, replaced the personal lines producer who then moved to commercial lines.
Those actions increased revenue growth and demonstrated that the key fundamentals were in place and working properly.
Sustainable gross profit margin
In that example, the true cost of sales was hidden by including owner salaries, the CSA salary and many sales-related items under the General and Administrative (G&A) category.
To provide the agency with better decision-making information, a true Gross Profit Margin (GPM) needs to be determined. This means that all costs associated with sales should be accounted for under the Cost of Sales category, which is subtracted from revenue to calculate GPM.
From a value perspective, the higher the GPM the better. A GPM that is increasing over time indicates that the selling process is becoming more efficient. In other words, sales resources are not being wasted.
Sustainable bottom-line earnings
Achieving and improving bottom-line earnings requires improving G&A in combination with improving revenue and gross profit.
Assessing earnings requires development of pro forma financial statements that consider the owner's desire to reduce tax consequences. This exercise removes owner compensation not shown as salary. Once restated, financial statements should demonstrate the agency's ability to generate reasonable profits, which in turn indicates that G&A is under control.
Restated earnings is a key indicator of the agency's ability to generate free cash, a major factor in establishing value, since this is often how acquisitions are funded. Accordingly, it is important for agency owners to understand and manage to a pro forma G&A model.
Balanced portfolio
In many agencies, the account portfolio is not fully understood or considered as a component of the value equation by agency principals. In other words, the account portfolio is for the most part accepted as is without in-depth examination.
While this topic is too complex to be covered fully in this article, it is important to consider that the account portfolio should: 1) be profitable for insurance carriers and the agency, 2) optimize customer relationships, 3) take advantage of marketplace opportunities, 4) demonstrate penetration of target markets, and 5) minimize risk.
In order to understand the account portfolio, agencies need to develop profiles of the portfolio. In establishing profiles, elements to be considered include an account identifier, ZIP code, premium, commission, producer, line of business, type of policy, and servicing hours required.
Profiles containing these elements should be established by carrier, producer, line of business and type
of policy.
Developing a clear understanding through analysis of these profiles is the first step in optimizing the account portfolio to achieve improved value. For example, in the agency mentioned earlier, some low-value accounts were transferred to the new personal lines and commercial lines producers. In addition some accounts were set up for non-renewal.
These account transfers created pressure on the mature producers to increase sales, but they accepted this challenge when it was presented as part of the context of the agency's business plans and goals.
Intellectual property
Most agencies of high value demonstrate a corresponding high degree of intellectual property that represents the sum of the policies, procedures, processes, intelligence, knowledge and expertise that make the agency function effectively. Intellectual property is an intangible asset leveraged by agency staff, empowering them to perform their work, and should be viewed as an investment toward improving agency performance and value.
Accordingly, owners need to first inventory the agency's intellectual property and then take steps to overcome any deficiencies. As noted above, commercial sales were increased by the structured sales process developed and implemented for commercial lines producers. That process should be considered intellectual property and is a good example of the value derived.
Management and key people
Talented people are the most critical factor for achieving agency success. This reality is most apparent in the high-risk venture capital world when potential investors evaluate opportunities. Almost without exception, the quality of management and key people is at the top of the list. Venture capital professionals under-stand the value of good people.
The value placed on management and other key staff is why it is extremely important for agency principals considering an exit strategy to have developed good staff and to have mentored a successor. This provides assurance that the agency's success can be perpetuated. As noted earlier, Margaret's husband had done neither.
Brand equity
Brand equity is in essence your agency's reputation. It is the reflection of how you and your staff conduct business with all of those with whom your agency does business--clients, carriers, staff, vendors, and third parties.
Brand equity is influenced by many factors, but the most important is personal contact. That is how reputation is established and communicated. However, personal contact should be enhanced by attention to other factors as well, such as advertising, promotion and the look and feel of the agency's facilities and all the ways its image is communicated.
With one agency, we conducted a survey of current clients, past clients, and prospects that had not become clients. The survey showed that owner perceptions were out of sync with how the agency was perceived by its audience.
As a result, new policies and procedures and a new mode of conduct were implemented within the agency to achieve the desired balance.
Strategic relationships
Another common attribute of high value agencies is their reliance on strategic relationships to assist in reaching the next plateau.
These relationships may include many different entities, such as members on the board of directors, members on an advisory board, financial institutions, law firms, and consulting firms that bring additional value to the agency through their own services or through their networks.
For example, one agency expanded its reach to new home owners through an advisory board member who owned a mortgage-banking firm. Another agency increased commercial lines sales through a banking relationship that referred small commercial customers to the agency.
Agency owners should actively encourage these types of relationships and build on them over time.
Summary
Building agency value requires attention to key strategic components beyond traditional measures. To build value, agency owners must invest their time and effort in addressing these components. In doing so, owners and their heirs will surely be better rewarded. *
The author
G. Edward Kalbaugh is a partner in Allegent Growth Strategies International, a full-service consulting firm specializing in services to the insurance industry. Allegent is based in Woodbury, New York. For more information, phone (516) 364-7034; fax (516) 364-7036; e-mail: info@allegentgsi.com or visit the Allegent Web site (www.allegentgsi.com).