ACG - Agency Consulting Group

The PIPELINE

A national monthly newsletter for agency principals dedicated to agency management topic

Keys To Agency Success In Trying Times

You don’t need to be a financial genius to see that over the past few years, the economy has “tanked.” But those of us watching key indicators see a turn during this year toward recovery. We also can see that recovery will also take a few years to accomplish.

Meanwhile, the current government needs someone to blame for the economy. Big businesses, including some banks and insurance companies, have been an easy target. Many, but certainly not all of them, have been greedy and have done some significantly stupid things. They have done some immoral things and some truly illegal things using their complex structures and resources to try to hide those acts from scrutiny. Had the economy not soured due to the financial crisis which many economists point out was caused by our own federal government’s actions to pressure banks to make unwise loans, sustained growth could have continued. These businesses would have followed the same course of action that has doomed them today. These issues would have eventually caused these businesses to implode, but the economic downturn uncovered the structural weaknesses sooner and caused the many failures of banks, insurance companies and other businesses.

In the early part 20th century, unions and anti-trust legislation was the response to greed and immoral actions on the part of big business. As has happened throughout history, the solution of today becomes the problem of tomorrow. Unions today are far from the “trust-busters” of yesterday. Now unions represent a great part of the problems that make us relatively uncompetitive in the world marketplace.

However, the actions by our own government to the financial and business crisis are even more onerous than the unions of yesterday since it gives severe authority, and sometimes actual business ownership, to a federal government that has proven ineffectual at best and incompetent to the task of overseeing itself or any other institution. Yet it is moved by the feeling that some oversight of business is necessary to “protect” the economy and our citizens.

But underneath and beyond the greed and avarice of some large companies remains the basic concept that created the United States: a free economy in which any individual or group could create the potential of a better life by virtue of their work efforts, new products and new ideas.

No business started as a huge, multinational corporation, including our insurance companies. Even the largest public and private insurance retail and wholesale entities are not exempt from the government’s scrutiny and repercussions. And government regulation, oversight and interference, much like rain water, runs downhill. That regulation will find its way down to small insurance businesses just like tax regulations that were constructed with large companies in mind and were then applied to small business.

Be prepared for your personal earnings and agency profits in privately held businesses to be REGULATED in the not-too-distant future. Frankly, this doesn’t matter for most insurance agencies. We don’t make enough profit to be considered “excessive.” Historically, agency owners have taken most profits out of the agency through compensation and benefits, leaving little in the agency for reserves. Smart business owners now understand the need for growth and working capital and have begun keeping money in the agency to sponsor growth. However, every agency owner’s dream is to make a good living and have a business that grows his or her asset base.

The most dangerous thing that government has done recently is to demonize financial success and profits. Isn’t success and profit why people start or invest in businesses? The expectation of rewards beyond our investment is the cornerstone of American life and the reason so many people from every country in the world migrate to our country. Without “labeling” the demonization of profits and success, we must take note that being successful, once the source of business school lessons and personal success stories is now considered a mark of shame and excess.

For over 30 years, we have told our clients that it’s not illegal to make a profit in the United States. Our goal is to work toward ever increasing profits. I’m not sure the first part of that statement will be valid for another 30 years.

Regulation is like cooking a frog. A little regulation, like a little warm water is good for us and keeps us on the ‘straight and narrow.’ But too much regulation is like slowly turning up the fire under the frog. He never notices until the water boils and he becomes someone’s dinner.

Insurance Agencies Stressed by General and Insurance Economic Conditions

The economy of the last three years has caused great stress to agency earnings. It has caused the fire to be “turned up” to keep insurance companies growing.

As the economy deteriorated, the insurance industry has had to respond by lowering rates even more than competition would demand. Individuals and businesses were “going bare” in the attempt to control their costs and remain in business. The insurance industry responded by sharpening their pencils, reducing rates and, in turn, reducing their own costs – including acquisition and service commissions and fees to insurance agencies.

Profitability has been slower to return to insurance companies because those lower rates were often not justified by loss experience and were certainly not compensated by investment returns. One result of that has been the further downward adjustment in contingency income and in contingency agreements to the independent agents that sell and service the carriers’ products. Now the “fire” has been turned up enough that we are all turning a little “pink.” Once these contracts are changed, a return to stronger profit sharing will be difficult.

Solving the economic problems of agencies and returning them to growth and profit

I’m not sure we are any more capable of solving our governmental problems than the other civilizations in history that succumbed to the excesses of government combined with the excesses of their populace. Although the Democratins and Republicrats each spout the mantra of smaller government, the government continues to balloon. Regulation has grown like a cancer in every area that government touches from taxation to regulation of insurance. If we cannot control or influence the outcome of these issues, we must direct our efforts toward those arenas we can either directly affect or, at least, influence. And, as a caution for the future and for the students among us, we must recall how the Gordian Knot was eventually solved. The Gordian Knot is a legend associated with Alexander the Great. It is often used as a metaphor for an intractable problem, solved by a bold stroke "cutting the Gordian knot.”

Solving the Problem of Growth and Profit of our Agencies

The two tenets mentioned at the beginning of this article are 1) continuous marketing and sales activity and 2) compensating employees directly in relation to their productivity and profitability to the business.

Most agencies sit in their offices waiting for clients and prospects to call them and do little, if anything, to sponsor those contacts. Growth is a planned event and is caused by daily activity that keeps your sales staff and your name in front of your prospects AND clients.

The key to compensation is an Incentive Compensation Program for sales, service, administrative and management personnel from the owner to the receptionist in an agency.

We at Agency Consulting Group, Inc. specialize in Strategic Planning for Growth and in the design of Incentive Compensation Programs. We can provide you a great deal of documentation regarding both Planning for Growth and Incentive Compensation. We urge you to call David Diamond, Marketing Director or Al Diamond, President at (800) 779-2430 if you would like more information on either program. Whether or not you use our services to implement either program, please educate yourself about them. These are the two things that an agency, large or small, can do to assure its recovery, eventual success and an adequate return to its owners. This will convince owners that selling their businesses is not the only way to reap the rewards of their career’s work effort.

The reality is that most agencies will choose not to do ANYTHING but worry about the condition and deterioration of their business. This article and message is meant to address the 5% of the agency owners who would like to actively cause their agencies to grow and profit. We look forward to your contacts.