Planning for Uncertainty

By Catherine Oak & Bill Schoeffler | April 22, 2013
uncertainty

The traditional business plan includes short-term and long-term goals, and projections. But how do you plan when you can’t guess what will happen? Some things are shifting faster than you can keep up with, while other things can drastically change based on politics. Part of the reason for our current economic challenges is short-term thinking. Traditional business planning is becoming obsolete.

However, if a business abandons long-term planning, it has no direction and will be totally reactive and not proactive. The focus on short-term trends will cause a business to chase after opportunities, instead of creating them.

What is a business to do in these uncertain times? Develop a plan that has both a flexible foundation and scalable systems.

Consider the typical insurance agency. It would have various lines of business: personal lines, commercial lines, group benefits, etc. Some agencies might have several niches like construction, retail, directors and officers liability, etc. These segments are the foundation of the business.

Scalability means to plan for increasing or shrinking a segment of business based on demand.

The business segments can be considered as something closer to long-term goals. It is easier to predict that health insurance is currently uncertain, while personal lines seems stable at this point. The key to long-term planning is to accept that one or more segments might not perform in the future. The agency needs to plan for flexibility between departments.

Other Industry Downfalls

When Coca-Cola introduced New Coke based on perceived trends, it ended up being a flop. Despite spending millions of dollars and untold work hours, the company was able to drop New Coke and rebrand “Old Coke.”

In contrast, Polaroid cameras were successful for many years. Unfortunately the company did not change or adapt to the digital age. Polaroid had no products other than its traditional “instant picture.” The company went bankrupt in 2005.

Regarding insurance agencies, if health insurance sales drop off significantly, how can those resources be redirected to other lines? Or, what options are available to decrease overhead? It is important for a business to add or delete segments of business as trends change. In most cases, these trends would take about five years, plus or minus a couple of years.

Create a Scalable Plan

Once the segments are identified and trends established, the next step is to create a scalable system. A plan needs to be established to grow or shrink each segment of business based on current trends.

Let’s assume the contractor’s niche is shrinking. What can be done to increase sales in the other niches? Scalability means to plan for increasing or shrinking a segment of business based on demand.

A scalable business is able to increase revenues while the ratio of cost to revenue is less to deliver than the current ratio. In other words, the cost of growing is far outweighed by the resulting profits. A scalable business is one that can take on new clients without increasing workload.

Businesses will always have operating costs, but scalable businesses try to keep low their variable costs – or the costs incurred with each customer they gain. A business that follows a scalable model will not have its cost per customer increase, even if it gains 100 customers overnight.

Insurance is a little less fickle than other businesses. Cabbage Patch dolls and Pet Rocks have a very short cycle compared to most lines of insurance. This means insurance agencies have a little more time to scale the business, compared to some other types of business. Insurance agencies are also not as scalable as a business that does manufacture widgets.

How Agents Can Scale

The good news is that when there is a focus on niches or specific lines, the agency is able to have some level of scalability. It is important to create a system to quickly adapt to short-term changes. If one line of business drops, the agency needs to be able to move resources to the lines that have the potential for growth.

This type of system will require cross training and individual flexibility. The business plan needs to incorporate these requirements and train its people to know when operations need to change.

Being proactive by planning ahead, rather than being reactive will lead to great results!

About Catherine Oak & Bill Schoeffler

Oak is the founder, and Schoeffler is an independent contractor, of Oak & Associates, based in Santa Rosa, Calif. The firm specializes in financial and management consulting for independent insurance agencies, including valuations, mergers acquisitions, clusters, sales and marketing planning as well as perpetuation planning. Phone: 707-936-6565. Email: catoak@gmail.com. Website: www.oakandassociates.com

From This Issue

Insurance Journal West April 22, 2013
April 22, 2013
Insurance Journal West Magazine

Top 50 Apps for Insurance Agents; Entertainment, Sports & Special Events; Directors & Officers Liability

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