AGENCY FINANCIAL MANAGEMENT
Clients seek a broader consulting relationship
By Paul J. Di Stefano, CPA, CPCU
Many agency staff members have not experienced a hard market and are not prepared to deal with it; even those who have lived through hard markets now lack some of the tools to deal with it.
In the past, Harbor Capital's consulting associates have typically been contracted to address limited agency issues and problems. Within the last 12 months, however, we have noticed that more clients are requesting a broader range of financial and management consulting assistance.
We believe that this trend toward more extensive use of consultants is related to a number of factors. Agents who previously have routinely utilized consulting services in such specific areas as agency valuation, litigation support or merger and acquisition consulting now find themselves dealing with what has become an increasingly changing property/casualty environment. The hardening of the property/casualty market that began last year, although long expected, was already creating its own set of demands within agencies before September 11, 2001.
Many agency staff members have not experienced a hard market and are not prepared to deal with it; even those who have lived through hard markets now lack some of the tools to deal with it. Directly related to the hardening of the property/casualty market is the concern about the potential loss of current markets and, in many cases, the inability to access other markets to help ameliorate dramatic rate increases.
National affinity organizations such as SIAA (Strategic Independent Agents Alliance) that have the ability to provide markets to smaller agents who no longer can get the attention of large regional or national players have experienced a resurgence of interest. Agents are considering strategic options such as joining these types of organizations, as well as the possibility of acquiring or merging in order to remain in a strong position. The hardening of the property/casualty marketplace has caused investors and analysts to bid up the stocks of the publicly traded brokers to all-time highs. With this inflated currency, these public brokers have been offering higher prices for acquisitions of independent agencies. Agencies that previously had not considered selling are now in many cases deep into discussions with acquirers. What this environment portends for the average agent is that the valuations put on acquisition targets is rising across the board.
In light of these market dynamics, it is understandable that agency principals are seeking more extensive guidance from consultants about their corporate development programs. Besides wanting to know about reasonable acquisition prices, they question whether the acquisition route is even the best way to proceed. With rising agency valuations, the principals wonder if investing in hiring producers would be a better use of funds.
These are not always easy questions to answer without understanding the thought processes of the agency principals as well as the ability of the agency to execute a specific business plan. For example, in many instances these decisions are complicated by internal perpetuation considerations, such as a family member's desire to pass on the agency ownership to a future generation. Although this scenario would seem to limit the options available to the agency principals, there are creative ways of addressing seemingly conflicting goals.
We continually encourage our clients to adopt a more expansive mindset about agency consulting services. As a consultant to many independent agencies, Harbor Capital Advisors has found that the more integrated the relationship with a client, the steeper is our learning curve in understanding the agency's operations and culture. The end result is that we become much more effective in addressing issues facing that client.
When it comes to corporate development, qualified agency consultants can add value by making recommendations about third-party transactions. For instance, although merger structures are potentially complicated, they can preserve cash and avoid leverage while enabling the agency to achieve critical mass. Agency consultants can steer the client through the myriad of issues that must be addressed in a merger. Areas such as shareholder agreements, buy/sell agreements and employment agreements all become important when contemplating a merger or acquisition.
In many cases, the agency's legal counsel or outside accountant may not be familiar with the legal and structural issues of an insurance agency deal. Agency consultants can bridge the knowledge gap while keeping this professional in the loop. This guidance can safeguard against overly complex and confusing negotiations that possibly could jeopardize a transaction.
The consulting process often begins with the preparation of an agency strategic evaluation. The optimal way to go up the learning curve regarding agency operations is to gather sufficient information about the agency's operations to prepare the evaluation document. This document makes it easier to recommend and respond to questions relating to agency initiatives under consideration.
Some of the hands-on experience and capabilities that agency principals should look for in a financial/management consultant include the following:
* Merger & acquisition and agency valuation capabilities
* Structuring and implementing both short- and long-term strategic plans
* Structuring and executing agency profit maximization programs
* Operational work flow analysis for maximizing client service and productivity
* Structuring rational and effective producer compensation programs
* Agency financial management, including allocation of capital resources, budgeting and projections, expense variation analysis and internal controls
* Agency management systems implementation, conversion as well as maximizing utilization for both accounting, management reporting and information management.
Many of our clients prefer having the ability to pick up the phone and call us to discuss issues that come up from time to time. Since clients are sometimes reluctant to call consultants on small matters, several of our clients have requested ongoing consulting services. We have responded by initiating a consulting program that is both proactive and reactive, in which our staff performs routine valuation and business plan updates as well also sitting on an advisory board. We are also available to assist with agency opportunities and internal issues that arise from time to time.
In terms of cost, many agents are struggling as to whether or not they should incur the expense of hiring a COO or CFO. While many larger agencies can benefit from that allocation of resources, many small agencies would find themselves hard-pressed to make that kind of hiring decision and investment. Having access to an agency consulting organization such as Harbor Capital Advisors can give agencies these capabilities on an outsource basis for a small investment. For example, Harbor Capital Advisors has a team of consulting professionals whose background includes former agency ownership, experience as chief financial officer of large regional and national brokers, as well as senior professionals who have extensive backgrounds in the mergers and acquisition of independent agencies.
In summary, the reason for hiring an agency consultant revolves around the fact that these consultants have the ability and experience to help agency owners achieve success. A cost benefit analysis will likely demonstrate that the added value derived from the right consulting relationship far exceeds the cost. Although there may be an initial reluctance to invest in hiring consultant services, agency principals must weigh the cost of going it alone. Bad decisions and failure to make decisions at the appropriate time can be costly to an agency. *
The author
Paul J. Di Stefano, CPA, CPCU, is the managing director of Harbor Capital Advisors, Inc., a national financial and management consulting firm which offers services to the insurance industry. Services include agency appraisals, merger & acquisition representation, strategic and management consulting. Harbor Capital Advisors, Inc., can be reached in New York at (800) 858-2732 or through its Web site (www.harborcapitaladvisors.com).