Inflection Points in the Growth of an Agency

By Tony Caldwell | October 19, 2020

Over the years, I’ve talked to many agency owners who are frustrated because the growth of their agency is stuck, and they seem to be running in place. No matter what they try or how hard they work, agency growth has plateaued. While this is a common problem, it’s neither universal nor insurmountable.

The solution is knowing when the inflection points are likely to occur and where to make adjustments to the business model or operational plans. In this way, agency owners can save a lot of time and frustration and ensure consistent and continued agency growth over time.

One: The First Hires

For some agency owners, the first plateau to be aware of comes as the agency grows through $250,000 of revenue. At $250,000, regardless of whether the agency is commercial or personal lines focused, the owner is faced with the need to hire additional staff.

Many agency owners, who have been spending increasing amounts of their time in administrative and customer service tasks, reflexively seek to hire a producer so that income will continue to grow. This is almost always a strategic error because a new producer means even more administrative and management tasks for the agency owner. This in turn takes away from sales time, which is usually the founder’s strongest capability.

What generally works better at this point is to hire additional service and administrative staff and allow the agency owner to continue to build the book of business.

Two: More Producers

The next inflection point, which is nearly universal, occurs somewhere around $500,000 of agency revenue. At this revenue size, the agency is generally established, operating well and producing a profit. For the agency to move to the next level, new production capacity will be required, and this means bringing on additional production capacity by hiring one or more producers.

The addition of producers, beyond the agency owner, to any agency adds a tremendous level of complexity to the business.

First, before the producers are hired, the agency must have very well-developed systems for business submissions, proposals and other routine administrative tasks.

Second, it requires that the agency develop more sophisticated marketing to support the additional production capability.

Third, it almost always means at least a temporary reduction in cash flow for the agency and, potentially, the agency owner to support the salaries required for the new producer(s).

There is so much additional complexity at this level that many agencies never rise above this threshold. The key to doing so is to begin preparing — from the very foundation of the agency — with excellent operating procedures, strong marketing and the discipline of retaining profits to build a strong balance sheet. This enables the agency to afford what’s needed for growth above a half a million dollars.

Three: Past the Million Mark

Not surprisingly, the next level where agency owners must make operational pivots to continue their growth typically occurs somewhere between $1 million and $1.5 million of agency revenue. When the agency grows to this size, it often has five to 10 employees and represents as many as a dozen insurance companies. It is usually involved in five or more niche markets and is often selling and servicing personal insurance, small business and sometimes middle market commercial accounts.

At this point, the accounting requirements of the agency also have moved beyond purely direct billing into the more complicated agency bill accounting process while human resources, administration, accounting, sales management, book management, business planning and cash flow management have all become more time consuming.

These increasingly complex requirements need an increased level of sophistication to do well. The entrepreneurial agency owner is now faced with a number of challenges and usually needs at least one person to be devoted exclusively to managing the agency.

In order to prepare the agency for continued growth beyond the $1.5 million revenue level, it is generally required to make an additional capital investment and experience a reduction in profits so the human capital needs of the newly complex business can be met. It can be frustrating for the owner to see the top line is growing while the bottom line is shrinking to some degree. However, as long as these investments are well thought out and intentional, the fact that the bottom line is shrinking to fund temporarily new investments should be encouraging.

Over two decades ago, insurance agency coach Michael Jans coined the term, “The Law of the Short Reverse” to describe the phenomenon where it is necessary to go backwards for a short period of time to accelerate forward. He likens this business requirement to a lion crouching before springing on its prey or a basketball player crouching before taking a shot. When this is anticipated, it can actually be welcome news that the agency is prepared, and preparing, to take its next leap forward.

Four: Sustaining Growth

Agency owners who have sustained strong and consistent growth over several decades and built their agencies well beyond the $1.5 million revenue level all acknowledge that the challenges of consistent and continual growth never cease. They almost always relate that growing the agency after this revenue level actually becomes easier. That’s simply because with more revenue and more people, the agency has the natural ability to encourage specialization. It can afford professionals who are very talented in its area of work, rather than being required to wear many hats.

The final keys to growth are focusing on maintaining strong profits, cash flow and a robust balance sheet. It is a relatively simple matter to grow an agency by double digits in the early years. But sustaining that kind of growth over time requires not only careful planning, but also the ability to recognize when past strategies are creating diminishing returns and require revamping and a willingness to continually invest in the business. Wherever an agency owner is in their development, recognizing the changes that are coming and when they are likely to occur can only help the owner be better prepared to meet them when they actually arise.

About Tony Caldwell

Caldwell is an author, speaker and CEO of One Agents Alliance, an alliance of 185 independent insurance agents in Oklahoma, Arkansas, Kansas and California.

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Insurance Journal West October 19, 2020
October 19, 2020
Insurance Journal West Magazine

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