LESSONS IN LEADERSHIP
I recommend a system called variable budgeting ... The budget must be monitored--monthly if possible, but certainly no more infrequently than quarterly.
By Robert L. Bailey
(Editor's note: Starting this month, Robert L. Bailey, the recently retired chairman and CEO of State Auto Insurance Company, will provide "Lessons in Leadership," a regular column addressing a wide range of leadership issues. Bailey's suggestions will be practical yet not always conventional. Although he has worked "at the top," his respect for the role played by every person in a company or agency is such that he always seems to be speaking "from the trenches."
During Bailey's tenure as CEO of State Auto from 1983 to 2001, the company doubled its states of operation
(from 13 to 26) and increased its annual sales from
$214 million to more than
$1 billion. He also presided over the creation of State Auto Financial Corporation as a public company in 1991. From that year through 2000, State Auto achieved an average compound growth of 14% in revenues, 23% in earnings per share and 16% in book value per share.)
It's unanimous! And it won't come as a surprise. Agents don't like to budget.
They're not alone. I don't know a single business person who likes to budget. Although this is not exactly a scientific survey, on a list of "things I like to do," it seems to me that the budgeting process ranks about 3,600th--three positions after elective brain surgery.
We're in good company. Jack Welch, of General Electric fame, called budgets "the bane of corporate America." Bob Lutz, formerly of Chrysler and now vice chairman of General Motors, said that budgets are "a tool of repression."
It's easy to list the things we don't like to do. But what ranks high on our "things I like to do" list? Dream. We all like to dream. And, especially, overwhelmingly successful agents have dreams--very clear visions of what they want to accomplish--and clear mental plans (and usually written ones) of how to get there. They know how to turn those dreams into reality.
It starts with a sales plan. Every "overwhelmingly" successful agent has a clearly defined plan of how he or she intends to get sales results. The plan is analyzed. What works most effectively? What's my "sales batting average"? (I call it a handicap. Your handicap improves as your sales skills increase). For instance, many know the number of phone calls they must make to get one x-date; they know how many x-dates they must accumulate to get one appointment; they know how many appointments they must make to get one sale; and they know the average commission income that one sale will produce. By working backwards, they can put a dollar value on every x-date phone call. There's no such thing as a failure. Every phone call--every contact with every prospect--brings success that much closer. Every phone call, even a hang-up, has a dollar value.
"Overwhelmingly" successful agents allocate their time to their sales efforts. An hour a day, say, is allocated to telephone prospecting. That time is blocked out on the agent's calendar. Nothing can tear the super successful agent away from this critical time allotment. One agent wears a ball cap while doing his telephone prospecting. It helps him to shift mentally into his "telephone sales" mode, and it lets his staff know that he is not to be interrupted from this critical process. Hokey? Maybe so, but if it works, do it.
How much gross income would you like to have in 2003? Go ahead. Dream. Dream big. Successful agents are dreamers--big dreamers.
Do you have that 2003 gross income in mind? Now, back into the physical activity that will be required to bring it about. How many prospect calls will have to be made? How many x-dates will have to be gathered? How many sales appointments will have to be made? How many sales must ultimately result?
I hate to say it, but that process is horribly close to that distasteful "b-word"--budgeting.
Of course, there's more to success than gross income. A more important matter is how much is left at the end of the day after all operational expenses.
"We don't need a budget. All of us spend company money like our own," many say. Successful agencies have to do better than that, for most of us have trouble managing our personal money. The convenience of plastic makes it easy for all of us to overextend. And there's a myriad of family expenses that keep mounting--one kid in college, another with braces, the home air conditioner that just went on the blink, and ... well, you know. Financial demands are such that it's easy for most of us to "live up" our salaries to the fullest.
Expense control has to be more carefully conceived than "spending company money like our own." There must be guidelines--a road map. Yes, the "b-word"--a budget.
"But," you say, "I like the Welch/Lutz approach. If no budget is good enough for them, it's good enough for me."
In huge organizations such as theirs, budgeting often becomes a bureaucratic nightmare that starts in March and ends in January, with preparation of dictionary-length, spiral-bound booklets; PowerPoint presentations to everyone who makes more than $20 a day; and, most important, budget gamesmanship involving "if I don't spend it this year I won't get it next year" mentalities. Instead of business success being the mission, the budget becomes the mission.
Most businesses still need a road map. Just where are we trying to go this year?
A good place to start is with industry benchmarks. There are a number of excellent benchmark studies available (such as What It Costs, published by The Rough Notes Company) that help agencies determine whether their expenses are in line with comparable agencies elsewhere.
I recommend a system that I call variable budgeting. (Oops! There's that "b-word" again.) This is not a term you'll find in accounting textbooks, but the system works. I used it at my former company for many years.
The variable budgeting process starts out with an estimate of anticipated gross income for the new year. That's the easy part and the fun part. It's fun to dream about how much money we're going to make.
Now we list all the anticipated expenses for the year. Write down everything--payroll, benefits, taxes, rent, utilities--I mean everything, no matter how small and inconsequential. How does the year look? Are you happy with the agency profit and your take-home pay?
What? There's nothing left at the end of the year? Then you have two choices--increase the gross income, or cut expenses. More gross income means more sales activities, and you know how to do that. You must develop a more aggressive sales program--which involves a lot more than aggressively waiting for the phone to ring.
If expenses are too high, they must be cut. Yes, there are certain fixed expenses that continue--and usually rise--regardless of sales. The landlord will insist that you pay your rent (unless you choose to operate out of a pup tent) and the electric company will continue to send you bills, regardless of your gross income. You can't do anything about many of these expenses. But there are controllable expenses as well. Are all your entertainment expenses really necessary? Can your present computer system or copy machine be stretched for another year? There is always a way to cut expenses.
Once you're happy with the profit the agency achieves and your own take-home pay, you have a budget for the new year. If everything stays on track--meeting sales goals and staying within expense budgets--you'll have a bang-up year.
Victory? Not quite yet. The reason a budget doesn't always work is that nobody looks at it again until the year is over, when the principal says, "Wow! We really messed up on our budget!"
The budget must be monitored--monthly if possible, but certainly no more infrequently than quarterly. Let's say sales for the first quarter are running behind goal. Instead of growth of 15%, growth is 12%. This is where the variable part of the budgeting process comes in. When sales for the new year fall below the mark for which you are shooting, expenses must be cut proportionately. Never permit expenses to exceed the percentage amount (even though expenses may be within the dollar amount) agreed to in the budget.
But you will make up for the shortage of sales with a super profit-sharing check at the end of the year? Possibly so, but that's a potential bonus that may get wiped out before the end of the year. You can't spend it until the game is over. In the meantime, cut expenses. There's always a way to do it.
Tough to do? You bet. But great sales people have great self-discipline. And self-discipline enables overwhelmingly successful people to execute their very aggressive sales plans while spending money responsibly. Successful people are successful for a reason. It doesn't just happen.
Budgets are a way of turning dreams into dollars. You have to admit that's fun, and it has to rank high on our "things I like to do list." *
The author
Robert L. Bailey is the retired CEO, president and chairman of the State Auto Insurance Companies. He now is a writer and public speaker on the topics of leadership, selling value, and strategic planning and is an advisory director of Securitas Capital. He is the author of Plain Talk About Leadership (Franklin University Press - 2002). He can be reached at rlbailey@dragonbbs.com or (740) 333-3092.