Today’s Market Demands Greater Efficiencies, Operational Management and Discipline
I have been working with agency owners in one capacity or another for 25 years. During this quarter-century, some aspects of agency management have greatly transformed, while others have not changed at all.
Clusters & Aggregators
A noticeable transformation is the development of clusters, aggregators and other similar market-providers. These providers have completely changed managing carrier relationships for thousands of agencies. For small agencies and for startup agencies, this has been a wonderful change. For some medium-sized agencies and some carriers, this change has been less than wonderful (although they may not know this) because they have entered into Faustian bargains with these organizations.
Information technology (IT) systems have changed dramatically, too. When my insurance career began, I knew many agencies that did not even have a single computer. Now, almost every agency has an IT system. A great IT system, when properly used, can help decrease the cost of sales, decrease errors and omissions (E&O) exposures, improve morale, decrease employee turnover and related costs, and improve the quality of customer service. The improvements and opportunities for agencies in this area are phenomenal.
At the same time though, the fantastic opportunities these systems provide are often so abused and neglected that I sometimes wonder why some agencies even have an IT system. If, for example, agency management does not require employees and producers to document files correctly, why bother with the IT system at all? To a large extent, the system becomes so underutilized, it is just a waste.
An important reason Wal-Mart is so fantastically successful is that it uses its IT system more effectively than many other similar retailers. By using its system so successfully, Wal-Mart is able to cut prices below the cost of what other retailers pay. Other stores have the opportunity to sell all the same products (i.e., all the carriers they would ever need) but most cannot match Wal-Mart’s price.
Young people in this industry today understand the power of technology. They know that becoming more efficient (like Wal-Mart) is critical. The alternative is to keep focusing on just making sales and believing more companies are the solution to all an agency’s woes.
Producer development opportunities have grown magnificently during the past quarter century. The industry today has a number of great producer hiring and training programs. When hiring producers, these programs can help reduce the otherwise horrible failure rate. Unfortunately, I see few agencies truly taking advantage of these programs. This is a key issue because producer management is even more critical for agencies today. Agencies are larger, commission rates are less, and producer development cost is higher. For some agencies though, the old way of just telling people to go out and sell must be working because so many agencies keep on trying it.
E&O management simply has not kept up with the times. Many agency owners/managers still truly believe in luck, good karma, and that bad things always happen to others. Plaintiff attorneys, though, have kept up with the times. And while agencies may not always use technology well, attorneys do. They know how to quickly find incriminating evidence using state-of-the-art methods. Companies are suing their own agencies more often, too, and they know where to look in your files. I have not seen evidence that positive thinking alone will overcome these developments.
In two wonderful books, “The Core” and “Beyond the Core” (which should be must-reads for all executives, entrepreneurs and agency owners), author Chris Zook analyzed thousands of market leaders and losers in every SIC code. The results are amazing. Every market leader had the lowest cost. They may not have had the lowest prices, but they had the lowest cost. Another key finding: The financial services industry, including insurance, had the greatest rate of people trying to fool themselves that focusing on the latest and greatest cross-sell would work.
Historically, cost has not been a driver in this industry. It is only a delayed driver for insurance companies because with reserves and tails, cost is either not adequately immediately evident, and if it is evident but does not paint the picture management wants, games can be played with reserves and price setting. For example, today when a large commercial client has a consistent loss ratio of 80 percent but another carrier offers to write the risk for 20 percent less than expiring while insisting the loss ratio will actually decrease, someone is either playing with reserves to achieve better results or simply fooling themselves.
For agencies, cost was not previously a factor because agencies were small and each new sale made the owner more money (notwithstanding the opportunity cost). In the past, a good salesman could create enough fat to pay for inefficiencies. Good sales paid for good morale, too.
With larger agencies, cost became more complex and in the softest market ever, it is much more difficult to create excess fat. In today’s market, it is quite easy for an agency to spend more than it makes.
Every day in this industry, I see the immensity of the challenges and changes ahead, and I see the opportunity. While recognizing sales, positive attitudes and good karma remains important, the market now demands discipline, true efficiency,and true operational management.
In today’s marketplace, operations have become more important and will become even more important. The great potential is in the combining the historical mindset of cutting deals and positive thinking with the new need for strong operational management. The change is not that one or the other is more important, but that if an insurance agency is going to thrive, it needs both – just like all true market leaders have both.