Part Two: Picking the Right Partner and Other Keys to Making It Work
What would happen if Amazon.com decided to start selling residential real estate? This may sound like a wild-haired idea, but it illustrates a point begun in Part One (see Insurance Journal, March 21 issue) about cross-selling.
Cross-selling opportunities exist for virtually every business, and the agency/brokerage model is no exception. Neither is Amazon.com. The Internet retailer began selling books, and now has six major product categories in tabs across the top of its home page, as well as another half-dozen diverse categories branching off from them. Buyers are told that “customers who bought that also bought this” and the site offers up related products.
But surely the brains behind Amazon would balk at the idea of real estate. Consider the differences between business models: click-throughs versus open houses. Call centers versus shoe leather. Drop-shipping versus showings and closings.
The comparisons make the point that there are definable keys to success in cross-selling, and it is wise to consider the compatibility of operation with potential new sales focus. Even if the business models are not so different, taking an approach that is too optimistic can result in an expensive experiment.
The banking model is a more reasonable example. In the 1990s, the banking industry clamored to get into insurance. Insurance trade magazines asked if this meant the end of the independent agency. Bank and insurance merger talk was rampant. But today, well into the experiment, very few banks will call out the stellar performance of their insurance operations in their annual reports. It hasn’t worked out as well as they had imagined. The investments and commitments needed to effectively cross-sell are perhaps greater than they anticipated. But brokers are not bankers or booksellers.
How can brokers effectively take advantage of cross-selling? Part one of this article proposed that the most effective way an agency can leverage its specialty is to create a joint venture with a similar, but non-competing, firm. Below are six keys to making that work.
Choose partners wisely
Your agency is the best in the field in a particular niche. You’re willing to provide that specialty in a joint venture with another firm that can bring its own specialty to the table as well. How do you effectively accomplish that?
Not surprisingly, the first key is to pick the right partner. There are three elements that must be present in the “right” choice. Foremost, both firms must share common goals. This must be truly evident by direct communication with the other firm’s principals. The gut instinct of a salesperson can serve well: if you truly feel a common purpose with this other firm, you’re at least a third of the way to a partnership.
Also, the firms must share a cultural fit, among principals and among employees. The firm must work closely together, and to do so it is imperative that they share similar values, working environments, and attitude toward success.
Finally, the firms must share a common geographic region and target customer base. This will enhance the viability of the joint venture’s new product to each other’s customers. Caution is appropriate here: the goal may be to use a joint venture to increase customer scope or geographic reach, but be careful of biting off too much. It will be challenging simply to incorporate the joint venture needs into the firm’s business, so piling a learning curve for a new customer group or trying to understand the needs of an uncharted region will add stress.
Create a profit-sharing equation
Equal risk-sharing is the second key to success of a joint venture. Rewards should be shared equally with the risk and proportion of customer base provided by each firm.
If, for example, one firm brings 60 percent of the prospective revenue opportunities to the joint venture, that firm should be entitled to 60 percent of the venture’s profits. The equation is rarely that simple. To make a full and honest division, both parties must assess what they bring to the table. One firm may bring more client opportunities for the other, but the other may have a more significant back-office.
Division of earnings may be an issue that is revisited throughout the joint venture, as the parties work as a team and gain an understanding of the other’s capabilities. The point is to create a balance at the time the venture is formed, by each partner thoroughly assessing how its contributions relate to the expected returns.
Build viable operations
The third element of a winning joint venture is creating a logistically viable operation. A joint venture should appear as a seamless operation. (This is in contrast to a strategic partnership, in which each firm is easily identifiable. Customers may react more positively to getting their comprehensive insurance solutions from one firm rather than two.)
In a constructive “due diligence” process, the partners work together to consider all logistical needs. These include leveraging the strength of back office resources and creating a well-executed approach to the market.
One agency’s office might have access to key markets sought by the venture, but the partner firm might be better able to service those accounts. In the logistics process, the partners must contemplate how to facilitate in-bound client services, for example. Careful integration planning on back-office functions will determine how well the venture develops its image as one operation.
Conversely, each partner also wants to ensure that the separate integrity of its business remains intact after the joint venture, because this arrangement is not a merger. Previously existing clients do not become the property of the joint venture. Each individual client relationship that existed prior to the formation of the venture remains the property of the respective firms. Existing clients should be given a clear explanation of the joint venture arrangement and how it structurally affects the business. Each firm should try to “up-sell” the client into the other firm’s products. When this results in new business, the commission is split.
Approach to a market
The fourth key to success is creating a well-developed approach to a market. This will require the creative direction and allocation of resources by both firms. In essence, it’s the heart of the joint venture business plan. What are the joint venture’s strengths and weaknesses? Where do opportunities exist? What are the competitive pressures and barriers to success?
This is an opportunity for the firm’s principals and key strategists to innovate. It’s an exciting time when all ideas should be considered. If it is a truly integrated effort, both firms will put all their energies into marketplace offerings and strategies to maximize the chance of success.
Many good ideas are doomed to failure due to problems with execution. The plan does not have enough meat on its bones, or staff implementing it has not adequately followed through. Cross-selling takes work.
This is one of the main reasons banks have under-performed in their insurance initiatives. Most banks have purchased insurance operations outright rather than creating joint ventures, but the follow-through issue is the same. In fact, this example serves to point out the wisdom of a joint venture as an “engagement period” discussed the first part (see IJ March 21 issue).
Another reason many bank/insurance operations have failed is that banks overpaid for the insurance operations.
A third reason for bank problems is not recognizing the cultural gaps between the bank and the broker. This, too, provides a useful example of the need for thoughtful integration.
Very often, however, the main reason for failure of a bank’s insurance operations lies in its excessive, aggressive or unrealistic expectations relating to cross-selling initiatives.
Allocation of resources also includes compensation. It is vital that each partner allocate enough human resources to the venture, then create a compensation plan that rewards based on the overall success of the joint venture.
Know the exposures
This should be second nature for an insurance executive. It’s imperative that a clear assessment of risks and exposures from the joint venture be laid out for both partners. The possible implications to the business must be well understood.
Ask: Does management of each firm share the same philosophies and views on the market? What are the value propositions each firm brings, and how can they be leveraged? Is there a mutually sound commitment to success of the joint venture? Is each partner working with adequate capital to fund the start-up and rollout? Will both sides have the commitment to focus on the long-term welfare and growth of the joint venture, versus treating it like an ancillary initiative? Do the reputations of the member firms align with one another?
Even with all these ducks lined up and quacking, agencies still need to safeguard operations with one more step. Make sure any joint venture has well-conceived, spelled-out exit strategies with which all sides are comfortable.
The joint venture mechanism can present many benefits without the economic risks of hiring or acquiring such new capabilities. Remember that firms that are creative and focused on finding complete, cost-effective, expedient solutions for their clients will ultimately be the most successful. Hopefully, you won’t have to resort to selling them real estate.
Steven S. Wevodau, managing principal of WFG Capital Advisors
(www.wfgca.com) has extensive experience in mergers & acquisitions and strategic consulting. He may be reached at (717) 780-7802 or at: swevodau
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