Analyzing Agency Management Benchmarks

By Chris Burand | February 20, 2012

I have been analyzing agencies for a long time, and I believe it is extremely safe to say that no two agencies are the same. At least I have never found two agencies to be the same. This is the problem with so many popular benchmarks – typical benchmarks by their nature treat all subjects the same.

For example, recently an agency owner asked me whether $100,000 revenue per person is adequate. In some agencies, achieving $100,000 revenue per person should be considered a total failure. In other agencies, achieving $100,000 revenue per person should be considered a miracle. Revenue per person has more to do with account size than agency size. An agency writing large accounts should more easily achieve $100,000 revenue per person than an agency writing small accounts.

Another factor to consider when using this metric is contingencies. An agency on the Gulf Coast, where standard company contracts are not easily obtained, will earn much less in contingencies than their Midwestern cousins. Sure, their accounts are going to be larger, but because so much of their business has to be agency bill through surplus lines, they need more people, too.

Another factor no one wants to talk about is whether the agency is actually servicing its accounts adequately. In tough times, some firms take shortcuts. They achieve high or at least higher revenue per person by taking shortcuts such as not reviewing policies at renewal, among many other shortcuts.

Sometimes agencies just need a small change to start heading down the correct path.

The bottom line is every agency is different. I have clients who have achieved great results writing mostly personal lines and others that completely forego personal lines. I have clients that have achieved great results writing small accounts and other clients that have achieved great results writing only large accounts. I have clients that have achieved great results on the West Coast, the East Coast, and most places between. I have clients that have achieved great results through organic growth and others through acquisitions. I have clients that have achieved great results writing in incredibly rural areas and in large metropolitan areas. I also have clients that on the surface have achieved great results but below the surface are complete disasters. It pays to know the difference.

My point is that this industry is so diverse, that managing by or trying to achieve generic benchmarks is pointless. There are many wonderful routes for achieving greatness, while generic benchmarks try to force everyone onto the same route.

Chemistry

Another way of looking at the situation is chemistry. Everyone always says this is a people business. If true, then this means people in agencies have to have the right chemistry to bond as a team. Such chemistry is really no different from the chemistry involved in studying molecules in a college chemistry course. It is fascinating that a tiny little tweak can change exactly the same atoms into a completely different substance. The best-known example involves graphite and diamonds. The atomic structure is the same. The way the atoms have been arranged is different, with the results being one of the softest substances and one of the hardest substances. They are on opposite ends of Moh’s scale of hardness, but they are basically the same thing. In other words, these two substances are basically the same but are at opposite ends of the hardness benchmark!

Sometimes with people chemistry, just like normal chemistry, there is only one way in which an agency can be arranged given the people (employees, customers, companies, community) involved. Trying to force these entities into a different but successful arrangement simply is not possible without causing combustion. Sometimes agencies need to be blown up to get rid of deadweight and negative influences. Sometimes agencies just need a small change to start heading down the correct path.

When using generic benchmarks, combustion almost never works. I know agencies that are deteriorating because they are forcing their agencies to achieve $x revenue per person without regard to the applicability of that standard. My advice to their competitors? Strike while the opportunity is hot. To achieve that goal, those agencies will be taking shortcuts, and that is your opportunity. Sometimes the opportunity is to get good employees, sometimes it is to get good accounts.

Good Benchmarks

Some benchmarks are definitely good. For example, without exception, all agencies should always have trust ratios of 1.0. It does not matter what kind of agency, this is written in code, legal code.

Another good benchmark is the percentage of activities in compliance with the agency’s procedures. This includes producers and whether they are in compliance with the agency’s standards for their sales activities. I know this sounds so corporate that some readers are angered simply by my mentioning it. Consistency results in lower costs and in an economy that does not show any signs of bouncing back strong, lower costs are essential. In the great business book, “Profit from the Core,” by Chris Zook, the author found that every market leader achieved that position through low costs.

Think of McDonald’s. One critical reason its costs are low, and therefore, its sales are always increasing, is that McDonald’s has the same procedures in virtually every store, regardless of the country. I know it may seem inadequate to compare an agency to fast food, but the principle is the same. Unless a business is catering to the extremely wealthy, think Ferrari or Bentley, standardization of processes and procedures is critical. From a benchmarking perspective, the standardization should be based on your agency’s personal processes and procedures, because what works for your people is vastly more important than what works for anyone else.

That said, when an employee states that standardization will not work for him or her, you have an element that creates instability. Most of these instable elements do not bring enough value to offset the cost of such instability. It’s best to part ways, on a friendly basis.

A really good third benchmark is whether the agency is truly profitable while still growing, at least a little. When using this metric, take out all the rationalization accounting such as not paying the principals enough and INCLUDE amortization and depreciation and taxes and interest (excluding these expenses, otherwise known as EBITDA, is a poor decision).

Finally, does the agency have goals to improve upon its own benchmarks and then is it achieving those goals consistently? If it is, success will meet the agency. In so many ways, this is a fairly simple business because what has to be achieved is fairly simple. Usually, benchmarks, goals, and even knowledge are not lacking. Usually, execution is lacking. Using the wrong benchmarks that do not take into consideration your unique chemical arrangement just gets in the way of great execution.

image of Chris Burand

About Chris Burand

Burand is the founder and owner of Burand & Associates LLC based in Pueblo, Colo. Phone: 719-485-3868. Email: chris@burand-associates.com. More from Chris Burand

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Insurance Journal West February 20, 2012
February 20, 2012
Insurance Journal West Magazine

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