Every day brings new press releases of company layoffs and spending cuts. More quietly, many independent insurance agencies are making cuts as they lose accounts, their clients eliminate exposures and their profit-sharing shrinks. However, many of these cuts are being made without adequate forethought. Some will cost more in time and effort than they actually save, while others will impair or even permanently disable the futures of these corporations and agencies. Penny pinching A major industry magazine recently published an article with a list of cost-cutting ideas for independent agencies. The recommendations included trimming entertainment expenses, shopping more carefully for office supplies, cancelling unnecessary magazine subscriptions, getting a better phone plan, prohibiting producers from cheating on their expense accounts and deferring IT upgrades. The problem with these ideas is that unless the agency is poorly managed, making such cuts will do little to really help in these economic times. In fact, if making such cuts does make a material difference, then the agency probably needs to change a lot more than to simply tightening up these expenses. In well-run agencies, such expenses are just too small to matter. Consider for a moment how much the average agency spends on these items. According to the March 2008 Hales Report, the average agency spends 1.7 percent of its revenue on travel/entertainment, 1.4 percent on office supplies and printing, 0.7 percent on dues/subscriptions and contributions and 0.9 percent on telephone expense. This totals 4.7 percent of revenues and includes many more expense items than the author noted in his expense-cutting list. If an agency could cut 50 percent of these expenses, the savings would be 2.35 percentage points of revenue. Unfortunately, such a savings is impossible for a going concern without damaging the long-term viability of the enterprise. More likely the savings is going to be 1 percentage point or less of revenue–and if 1 percentage point of revenue makes the difference between an agency surviving in this economy or dying, the agency has far more severe problems than penny-pinching subscriptions. Moreover, by cutting some of these expenses–postponing IT upgrades, for example–the agency is likely to impair its future productivity. Additionally, the savings would not be the full 1 percentage point because it costs money to save this 1 percentage point. For example, someone has to study all of these minor expenses and decide what to cut, and then probably argue with others in the agency about the cuts. Next, someone has to spend considerable time shopping for savings. Finally, someone has to monitor the expenses to ensure the expense cuts stay cut. What makes more sense, spending hours penny pinching or using that time to sell? Layoffs The big-ticket expense item in agencies is compensation. The average agency spends 65 to 75 percent of its revenues on compensation, including that of owners. It is a lot easier to shave expenses when examining items that make up 65 to 75 percent of one's budget rather than looking at items that make up less than 5 percent. Plenty of managers recognize this, which is why they focus on saving money by laying people off. But too many layoffs are short-sighted and damage the long-term viability of the business. Not only do good people lose their jobs, but layoffs, especially laying off good people, sends the wrong message to clients, vendors, carriers and the remaining employees. It sends the message that the business has not been well managed and its future is looking grim. Such cuts are reactive, not proactive. Compensation can be trimmed much more intelligently. Make smart cuts With forethought, dedication and discipline, agency owners can cut expenses proactively and intelligently. "Smart cuts" send a positive message that the agency is strong and that the cuts will help build the agency for the future. Three key areas where agencies have an opportunity to reduce expenses while building a stronger agency:

1. Improved efficiency through procedures. Does the agency have strong procedures that are followed by everyone, including producers and owners? If not, this is the place to start because agencies can improve staff productivity 10 to 20 percent when everyone works together uniformly. An added advantage: E&O exposures decrease.
2. Improved efficiency through IT. Do not skimp on IT. Get all of the staff dual monitors, head sets, at-desk faxing (if still necessary for your customers), and a good scanning process. This will save your agency another 10 to 20 percent. Some readers will think that I am ridiculously behind the times with this suggestion because they have been doing all this for a long time. However, a lot of agency owners and even CSRs still do not understand the benefits these items can provide. What an opportunity they are missing!
3. Do not pay producers for not working. Paying producers for business they do not produce and do not service is the biggest waste of money in agencies. Stop paying producers for walk-in and call-in business. If the producers do not work the renewal–I mean really work it, rather than have the CSR "renew as is" without talking to the client all year, much less review coverages with them–why pay them?

I hear a lot of agency owners today complaining about the federal economic rescue plan for giving money to people who did not earn it. Ironically, they are doing the same thing when they pay producers for accounts the producers do not work. Test your agency by asking yourself, and honestly answering, "What would happen to my new business if the CSRs wrote the walk-ins and call-ins? What would happen to my retention if I did not pay producers on renewals they never touch?"

In many agencies, this change alone will save tens of thousands of dollars, improve morale, minimize E&O exposures and reduce the constant frustration agency owners feel as they perpetually wait for their producers to finally begin succeeding. Smart cuts don't cost money, they save money. They improve morale rather than ruining it. Smart cuts focus on improving the agency for the future rather than taking small steps and hoping the economy turns around before drastic measures are required. Smart cuts produce opportunities to write more business and higher-quality accounts by creating extra capacity through better productivity and eliminating wasteful spending on unprofitable activities. They also create the opportunity to use the savings to hire high-quality staff and producers–from other companies making rash, reactive cuts. An agency cannot cut enough office supplies to even hire a part-time quality clerk. With your competitors going the wrong way and you going the right way, the distance between your and your competitors will grow quickly in your favor. Chris Burand is president of Burand & Assocs. LLC, an agency consulting firm. Contact Burand at 719-485-3868, or by e-mail at [email protected].