Planning for Uncertainty

By and | July 21, 2014

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 or are changing based on politics.

Traditional business planning is becoming obsolete. However, if a business abandons long-term planning, it will be reactive. Focusing on short-term trends will cause a business to chase after opportunities instead of create them.

In uncertain times, develop a plan that has a flexible foundation and scalable systems.

The typical agency has various lines of business: personal lines, commercial lines, group benefits, etc. Some agencies have niches like construction or retail.

The key is to develop a plan that has both a flexible foundation and scalable systems.

The business segments can be considered closer to long-term goals. It is easier to predict that health insurance is uncertain, while personal lines seems stable. 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 was a flop. Ultimately, the company dropped New Coke and re-branded “Old Coke.”

Polaroid cameras were successful for many years, but the company went bankrupt in 2005 when it failed to adapt to the digital age.

Regarding insurance agencies, if health insurance sales drop off significantly, can those resources be redirected to other lines? What options decrease overhead?

Create a Scalable Plan

Once business segments are identified and trends established, create a scalable system to grow or shrink each segment of business as trends and demands change. In most cases, trends take about five years.

If the contractor’s niche is shrinking, how can you increase sales in the other niches?

A scalable business can 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 agencies are not as “scalable” businesses that manufacture widgets or sell software because the business relies on the output of staff to increase revenue. Time and staff resources limit revenue growth.

Niche Business

When there is a focus on niches or specific lines, the agency can be more efficient in selling and servicing an account when compared to an agency generalist.

Program business is a further refinement of this concept. An agency might have the exclusive rights on selling insurance for an association. Typically, there is one policy and it is often slot-rated. These types of sales make the business very efficient and much more “scalable.”

The key with niche and program business during uncertain times is to have more than one niche or program. If one business drops off, the agency can focus its resources on the other. A good rule of thumb is to have less than one-quarter of revenue from any single niche or program business.

Cross Selling

Another technique for uncertain times and to increase scalability is to cross sell. Which sounds more profitable, an agency with 100 clients that only have auto insurance, or an agency with 50 clients that have auto and homeowners? Fewer clients usually means less work. Selling more products to each client lowers the cost of each sale and improves profitability.

Cross-selling also mitigates losses due to uncertainty. There is a certain level of risk in selling any one product. However, the risk drops tremendously when a variety of products are sold. Company X might jack up auto insurance rates. If they were the firm’s sole provider, the business would be in trouble. However, if Company Y’s auto insurance is sold with homeowners and business and life, the impact of Company X’s rate increase would be minimal.

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