For the Manager: Seeking growth advice? Don't forget to ask the cost

Some agencies are spending thousands and thousands of dollars to learn to sell more, increase retention, manage their producers and agencies better, hike agency value and so on. Agencies will spend $15,000 to $50,000 annually on consultants and programs offering advice and hopes of prosperity. Some of these programs are quite good. Others, quite frankly, are worthless.How does an agency owner sort the good from the bad? The key is asking one critical question: Where’s the cost? I don’t mean the cost of hiring the consultant or attending the program; I mean the cost of implementation. Most often this cost is not mentioned, but there is always a cost.When it comes to seeking outside help, owners face two primary factors that make identifying the truly good programs difficult: excessive optimism and worshipping false gods.o Excessive optimism. To prosper in the insurance industry–and to be a successful salesperson in any industry–one must be an optimist. But optimism comes at a price. Optimists do not always critically examine people or their work. The “glass is half full” outlook sometimes makes agency owners easy marks for chipper consultants singing happy tunes.o Worshipping the false gods of sales growth and market share. In the December 2007 issue of Inc. magazine, columnist Norm Brodsky provided insight into why business owners often have difficulty solving problems. Brodsky wrote that owners always try to overcome obstacles with solutions drawn from their own backgrounds. For example, if an agency principal is a producer, he or she will try to solve all problems by selling more, with the belief that the Great God of Sales will heal all. Except … it won’t.Other research suggests that a very large percentage of executives measure their success primarily by sales growth or market share because this is the easiest way to keep score. A landmark study from the Wharton School of Business, “The Myth of Market Share: Can Focusing Too Much on the Competition Harm Profitability?”, concluded that zeroing in on market share is counterproductive. Research showed that from 1938 to 1997, market share goals “negatively correlated with ROI.” Chasing sales for the sake of chasing sales, then, is worshipping a false god. Since so many agency owners are eager to bow to the golden calf, advisors are only too happy to set up shop to help them do exactly that.Overcoming these two factors is difficult, but recognizing that a cost exists for everything is the first step. Countless advisors and advertisements will tempt your craving for landing another sale. The need to beat the competition will gnaw at you. But when evaluating a program, marketing idea or consultant’s advice, ask these questions: What’s the cost of this idea? Is the additional revenue greater than the cost? Will this plan actually result in greater profits?Consider these examples:1. The XYZ Marketing Plan sounds awesome. It does everything agents have learned a marketing plan should do. It has a cross-sell function, an upselling component and it touches prospects multiple times. Simply put, the plan looks very convincing.But where’s the cost? What are the implementation and servicing expenses? Does the plan produce profits when all these costs are included? I’ve seen marketing plans increase the cost of servicing clients to four times the industry norm while achieving only average retention and growth. In other words, the plan cost more than the revenue it produced. As the saying goes, you need to do the math.2. The New “Acme” Sales Management Program includes sales training, sales management, producer development and quality client services. The program, as described in a national magazine, really sounded fantastic.When I reviewed the headlined agency’s results outlined in the article, though, I saw producers doing no better than average. I saw an average growth rate and a less than average profit margin. I saw no actual benefit from this costly program beyond helping the agency owner worship false gods. I’m sure he felt a lot better about his business, but the actual numbers certainly didn’t justify any euphoria.3. I recently read a report by a leading consulting firm detailing how much more money an agency will make if it increases retention from, say, 89 percent to 93 percent. The report was beautifully written and seemed to make a great case. In a nutshell, it stated that for every $1 million in commission, an agency loses $110,000 at 89 percent retention, versus losing only $70,000 at 93 percent retention. Therefore, at 93 percent retention, the agency keeps $40,000 more revenue annually, and if it sells the same amount of new business at 89 percent retention, the agency will grow materially faster. At a 25 percent profit margin, this is an extra $10,000-plus of profit every year. The conclusion: Increasing retention is a great way to increase revenue.But at what cost? What’s the effect on the agency’s profit? An agency cannot simply wave a magic wand and bump retention up four percentage points. Improving retention costs money; that’s just a fact. To increase retention, an agency must either improve customer service, shop accounts more often, cut renewal prices, provide value-added services, roll books to more competitive carriers, fire producers who are not placing business that sticks and hire producers who do, or hire consulting firms. Needless to say, none of these options are free.The benefits of these actions may or may not outweigh the cost. The point is that a cost always exists. No agent should ever act on advice or implement a program without first carefully evaluating the expected revenue and costs. More is not always better.4. “Learn how 123 Agency achieved 20 percent growth in a soft market!” This headline gets every producer’s heart pounding, because it appeals to their most basic instincts–sell and beat the other guy! But here’s the question: What is the price of 20 percent growth?I saw one agency achieve 20 percent growth by paying producers 60/60. I saw another achieve it by giving away the first-year commissions as discounts to the customers. Yet another agency achieved it by not writing accounts properly. Before jumping on this bandwagon, make sure you really want to join the band.5. Sometimes agency values are based on outrageous projections of future growth. In one such case, the valuation was based on a projection that the agency would not only grow at triple its historical rate, but would do so in a soft market! If that wasn’t challenging enough, this growth was also projected without any operational changes–no new producers, no new markets, no new marketing programs, no new training, no new value-added services, no nothing. Maybe this is possible in a fantasy insurance world, but in the world in which you and I live, growth costs money. This errant projection cost the agency six figures.To achieve growth beyond premium inflation and exposure growth, an agency must hire and train producers and CSRs, purchase leads, increase advertising and marketing, employ sales consultants, add value-added services and increase retention. This all costs money, especially in a soft market. Beware of advisors who say they can help you achieve fast growth without substantial cost. They likely have some subprime debt to sell you, too.Chris Burand is president of Burand & Associates LLC, an agency consulting firm. Readers may contact Chris at (719) 485-3868 or by e-mail at [email protected].