Sources of revenue

One chart you can view or print is titled “Sources of Revenue.” For each agency size category, it shows what percentage of revenue comes from commercial property & casualty accounts, from personal-lines property & casualty, from group life & health, and from contingency fees.

In 1975, I worked in a small, fairly new agency in Gainesville, Fla., that wrote about 70% personal lines. One day, a company representative walked into my office and announced that we would be out of business within five years if we didn't get out of personal lines. There was no future in it, he said, because State Farm and a few other big, national carriers owned it, so we might as well give up. If we weren't writing 70% commercial within three years, he continued, we could kiss our livelihood good-bye. Other so-called experts and consultants told me my business would fail because I wasn't automated, or because I had too many people working for me, or because I didn't have enough people working for me. Gurus are always proclaiming that their way is the only way to succeed, but Best Practices data shows that a variety of approaches all can work well if they're properly executed.

According to the Sources of Revenue chart, most Best Practices agencies primarily write commercial lines, but others are doing quite well in other lines, too. Some excel at writing employee benefits; and for others, group life and health represent a significant source of revenue. I found it especially interesting that contingency income figures are almost identical across the board. While you might assume that the larger agencies have learned how to leverage contingencies to the hilt, apparently they have not.

Two other intriguing charts indicate the percentage of agency revenue and growth from individual life & health and from group life & health accounts. The figures show that smaller agencies are getting out of the individual life & health business, while those in the middle income brackets–those with $2.5 million to $5 million in annual revenue–are pursuing it aggressively. The latter organizations are bigger than local mom-and-pop shops, but not big enough to compete with industry giants. They understand that to survive, they must grow, and to grow, they need to pursue revenue wherever they can find it–and they're finding it in life & health. In the past year, the over-$25 million category has not experienced much L&H growth. The largest agencies still write a lot of individual life & health business, but, as a percentage of revenue, not as much it as they did in the past.

The findings for group life & health sales are similar. (And these figures don't just represent major medical coverage; they also include 401(k)s and other payroll products.) Smaller agencies are moving away from group benefits, and not necessarily because they want to. Rather, I think they're being muscled out. In many states, carriers won't talk to an agency unless it produces a certain volume of business, and as a result, smaller agencies can't access the products the way they once did.

Do you feel as though you've hit a plateau? Maybe you're located in a small town, you've written everyone's homeowners and auto policies, and you think there's nothing left to pursue. Or maybe you and your biggest competitor just keep trading clients. Many independent agencies opt not to write life & health or simply overlook employee benefits. They think they can't do a good enough job writing a variety of accounts to make it worthwhile, or perhaps they brought in a life producer in the '80s, got burned and swore they'd never do that again. Either way, it's too bad, because money can be made in all lines of insurance. Any time an agency forsakes one of them, it passes up a chance to increase its revenue. If you really don't want to tackle life insurance and employee benefits, maybe you could refer such accounts to someone who does write the coverage and will pay you a percentage of their commission. Or you could send them to life-and-health agents who agree to send you their P&C clients. Then you'd still be making money from those lines without handling them directly.

Productivity

Revenue numbers are key. One Best Practices chart, for example, shows revenue per employee. If you don't already track this number, I suggest you start doing so, because it relates directly to your agency's bottom line. I often hear people ask agency owners how many accounts their people handle. A better question would be, “How many can they handle right?” And what does “handle” mean, anyway? A CSR may process thousands of direct-bill statements, but that has little to do with relationships, connections and customer service, all vital components of a CSR's job. A computer may be able to handle 45,000 direct-bill statements, but I don't consider that a service. I doubt that a CSR can service–truly service–more than 200 or so accounts. If your CSRs are always in a hurry to get off the phone, or if they complain that all the incoming phone calls are interfering with their work, your system may need an overhaul. To gauge employee productivity, I'd choose revenue per employee over the number of accounts they service. I know agents in Florida and New York City who write coverage only for people in the entertainment industry. Their revenue per account is exceptionally high, and six people may work on one client's account. Is it meaningful to compare their productivity with that of a CSR who services 500 simple homeowners accounts? It may be, if you look at revenue per employee.

Spread per employee

Another of my favorite revenue numbers is spread per employee. It's a simple but critical statistic, yet many agencies ignore it. Spread per employee is the difference between the amount you pay an employee and the revenue he or she generates for you. (For Best Practices purposes, compensation is everything that goes on a W-2 form.) Spread is important because it affects your agency's bottom line. If an employee brings in more money than you spend to employ her, keeping him or her onboard increases your profits. On the other hand, if the spread for that employee is a negative number, then you lose money by keeping her. Many agencies operate with negative spreads; they've got good people who work hard, and they don't understand why their businesses are failing.

A friend from an Orlando agency called one day and asked if I knew a certain producer. I did, and he was outstanding. The friend told me the producer was unhappy at his current agency. Several brokers were engaged in a bidding war for him, and my friend was determined to win. He asked me to review the noncompete agreement he planned to present to the producer. I saw that it promised the producer a 60% commission on new business and 40% on renewal. Holy cats! I called my friend and asked if he had an opening for me. I told him no agency could afford to pay an agent what he was offering. How did I know that? Best Practices' The Top Producers book contains a section on compensation that includes a “down and dirty” worksheet to help you determine how much you can afford to pay. It says the top agencies pay their producers, on average, 35% to 40% commission for new business. After a typical agency pays staff salaries and other overhead, it has less than 50 cents left from each dollar of commission earned. If my friend has 40 cents left after expenses, and he pays the producer 60 cents, he will lose 20 cents on every new account the guy writes.

Spread per employee can also help you determine appropriate compensation for CSRs. When you calculate the spreads for your agency's employees for the first time, the results may surprise you. They also may prompt you to adjust your pay structures. If you have several account managers who each bring in around $75,000 in annual revenue, but another one is generating $200,000, you'd better make sure you're compensating the heavy hitter appropriately. If not, the account manager may figure that out and bolt for greener pastures–taking along valuable skills and relationships.

You'll have to decide how much you're willing to pay to keep such a profitable employee onboard, and the spread can help you do so. It can also assist you in a different situation. Suppose a CSR announces that he will leave unless you increase his salary. You can show him that the spread–your share of the profits–is $15,000 for every other employee, but negative $3,000 for him, and ask him to give you a good reason why you should keep him on the payroll. You don't even have to get personal, because numbers are impartial. CSRs and producers either generate revenue for the agency or they don't, and you'd best know the status of all of yours.

Producer and CSR activity

If you've ever wondered what, exactly, a producer does to become one of the best in the country, then the section titled “How Successful Producers Spend Their Time” probably will interest you. According to the related chart, producers at Best Practices agencies spend 20% to 35% of their time on new sales, about 50% of their time servicing existing accounts, and 5% to 7% on professional development. Several other sources report that sales agents in most lines of business devote only 20% to 25% of their time, on average, to generating sales. Otherwise, they're processing paperwork and performing other ancillary activities. The latter things are necessary, of course, but are not what we hire producers to do. So what's going on? CSRs aren't servicing accounts because they're busy with paperwork and processing, so producers are doing their own paperwork and thus are not selling as much as they could. Considering that top-notch producers make big money by selling insurance only about 30% of the time, imagine what they could accomplish if they concentrated on sales 40% of the time! CSRs and producers often tell me they could dramatically increase their productivity, if only they had less paperwork to process and more time for sales. Well, if I were an agency owner, I'd seriously consider paying someone $40,000 or $50,000 a year to handle paperwork and other mundane tasks so my CSRs could have more time to service existing accounts and free producers to bring in an additional $200,000 or so each. In fact, I don't know how the agencies in the chart's middle brackets, those with $2.5 million to $5 million in revenue, can afford not to do that.

By the way, across all revenue brackets, producers reported spending an average of 26% of their time actually selling, which means going on appointments with clients and prospects–the thing they do best and for which we hire them. If you were writing workers compensation for them, you couldn't classify them as producers because they don't spend enough time performing that job's primary function! You'd have to classify them as service people. Of course, I'm quoting numbers, and when you interpret them, you might choose to factor in agency culture. Still, we're missing a lot of opportunities to generate sales and increase revenues.

If producers spend the bulk of their time on customer service, then what do CSRs do? Best Practices data indicates that those in top agencies of all sizes spend 50% to 60% of their time on customer service. So our service people aren't servicing accounts full-time, either. Instead, they're processing–pushing paper, logging onto companies' Web sites to enter data six times to get six different quotes, and issuing and faxing certificates. Some people might call such activities “service,” but to me it doesn't seem very productive.

Have you ever wondered how much time agencies save their CSRs by using a carrier's customer service center? If you have, the answer apparently is “not very much.” Best Practices offers data for agencies that don't use such service centers, and for those that do, and the figures are almost identical. In the latter case, the time CSRs devote to servicing accounts drops only slightly. If I managed an agency that paid for the use of a service center, and it didn't significantly reduce the amount of time my CSRs spent servicing accounts, I'd certainly wonder what I was paying for. Is the service center doing what it agreed to do? Are agency personnel letting go of their work so the service center can handle it instead, or are they still holding on to it? I don't mean to suggest that you shouldn't enlist the help of a service center, but if you do, be sure it truly increases your agency's productivity and that your own people aren't still performing duties that you're paying someone else to do.

Receivables management

Suppose I could tell you how to make a ton of money, and perhaps add 10% to 20% to your bottom line, without adding staff. Would you be interested? If so, then be sure to look at the sections titled “2005 Receivables/Payables Ratios” and “2005 Aged Receivables.” The two related graphs illustrate how much money agencies–even the top ones–forego by allowing receivables to languish on their books. Agencies in the two smallest brackets are the worst offenders, with receivable/payable ratios of more than 70%, but the other agencies' ratios also exceed 50%. In terms of aged receivable, the difference between smaller and larger agencies is more dramatic. Some agencies carry such accounts on their books because of friendships, sentiment, laziness and other reasons I can't fathom. Regardless, such accounts represent dead money. It costs you to keep them on your books and to try to collect on them, but you don't reap any benefit from them.

Imperial Premium Finance conducted a special Best Practices study on the amount of money agencies forfeit because of poor receivables management. The results were stunning. They showed that agencies are essentially throwing away as much as 6% to 7% of their total revenue. Depending on the size of your agency, the amount in question could be a few thousand dollars, or it could be millions. One agency they studied had $50 million in annual revenue, and it was giving up $3 million a year because it failed to manage its receivables.

Companies like Hilb Rogal & Hobbs often find after buying an agency that they can send several points of additional profit straight to the bottom line by finding and eliminating waste in such areas as receivables. If you saw a huge stack of cash lying on the sidewalk, I doubt that you'd walk by without picking it up. But you're doing basically the same thing if your agency carries past-due receivables.

I've given you a few examples of the types of data Best Practices offers. You don't have to read or interpret all of it, or make drastic changes at your agency, to benefit from it. Even if you're not a numbers geek like me, you're sure to find some of the information fascinating and useful. You can begin by focusing on the areas that seem most relevant or applicable to your agency and perhaps revisit others later.